MR. RISLANUDEEN MOHAMMAD is an economist and Harvard alumnus. He one time worked for Centre Point Merchant Bank Ltd, and later for Unity Bank where he rose to the rank of an executive director and also acting managing director. He speaks on the Nigerian economy in this interview.
What is the effect of insurgency on Nigeria’s economy?
Insecurity naturally leads to diverting money needed for growth in infrastructure to cost of containing the insurgency which is as much as 3-4% of Nigerian economic output. The federal government already discounted 2015 GDP growth rate by half percentage point due in part to Boko Haram. Security budget has been as much as 20% of annual budget, thereby crowding out votes for infrastructure like health, education and road. Insurgency in the North East has been having devastating impacts on the economy of entire North and Nigeria generally. Gini coefficient of income inequality is heavily skewed against North. Up to certain level, foreign investors can take the risk and live with insurgency since the heart of Nigerian economy, which is Lagos, remains safe. It is a huge distraction. Generally, insurgency has impacted negatively on Nigeria’s economic growth potential. The economy, driven largely by internal consumption, may eventually need a marshal plan to deal with lopsided growth.
Nigeria recently devalued her naira. What does this portend to the economy?
Economic decisions are taken based on exigencies of the time. Devaluation or adjustment of currencies is determined by several factors. From mid-2014 the Nigerian economy experienced some negative indices largely accentuated by declining oil price in the international market, coming just after some positives in the early part of the year, specifically the rebasing of Nigerian economy, making us the largest economy in Africa with a total GDP of 510 billion United States dollars, and 26th largest in the world. From the middle of last year, the oil price began to fall from about 115 U.S. dollars per barrel to the current level of about 48 dollars. Nigeria’s foreign exchange income is 75% reliant on oil. The devaluation was done when oil price was heading south and hovering around 60 U.S. dollars. The budget needed to be adjusted twice and it still needs to be adjusted again unless we want to finance the budget with deficit. The initial budget was based on 78 dollars per barrel, and later adjusted to 73 dollars and again 65 dollars per barrel. In an economy that heavily relies on oil for its foreign exchange earnings and also heavily import-dependent, if there is any adverse effect on price, the economy will be badly shaken. Excess supply in the midst of dwindling demand naturally leads to price decline. Reduced forex income in the face of near constant import of goods naturally puts pressure on the forex market which further gets compounded by speculative and panic demand. In addition there is issue of U.S. ending its stimulus Fed tapering leading to exit of short term Foreign Direct investments or hot money to deal with. The options are either to simply remain ignorant of it and allow the huge gap between the official and black market rates, or the currency has to be adjusted. Either way, it is wrong to continue to draw from the reserves to the extent that you are getting neck-deep. The Central Bank of Nigeria said our reserves can support up to eight months of imports. Once it comes down to less than six months, the international financial institutions will ask questions. The International Monetary Fund will call on Nigeria to seek financial support. This implies borrowing. The CBN knows that there is a problem if a huge gap between the official foreign exchange rate and the black market rate exist side by side with the liquidity in the banking system. There will be an opportunity for speculative demand and further pressure will be put on our weak reserve which will be detrimental to the economy. The CBN has come up with some policies for banks, raising the MPC to 13%, cash reserve ratio to public sector deposits maintained at 75% while increasing that of private sector to 20%, zero rising net foreign exchange open position limit among others. Simply put, an adjustment in price or devaluation is necessary at that point in time and CBN took the right decision with the monetary policy tools at its disposal.
The finance minister recently called for increased taxation on some goods. Can’t that be a palliative measure?
Economic data post GDP rebasing clearly shows that our tax revenue to GDP ratio is down 12% from 20% before rebasing while non-oil tax was down 4% from 7% before rebasing. What this shows is our tax assessment collection and administration needs to be massively enhanced and aggressively improved. Steps taken by the finance minister are in the right direction but not enough. The key issue is that we have to cut our coat according to our size. Recall the first thing she did even before collapse of oil price but after rebasing figures came out was to immediately hold a strategic meeting with Federal Inland Revenue Service staff to discuss the glaring challenges of tax avoidance and evasion. Over the years, the oil price has been going up. Other countries have built huge reserves. We have not done that and it’s time for reality check with the hope that it will be the beginning of ending reliance on oil as major income earner to the three tiers of government.
How much can e-revenue collection mechanism introduced by the government curb corruption in the country?
It will curb corruption because it is all about blocking leakages. E-collection is an emerging information technology solution that helps in blocking leakages and once that is achieved, the money goes into the government coffers. For example, since the e-collection strategy introduced by the Nigerian Immigration Service came into effect, the corruption that used to thrive there has stopped. At least what is due to government must be paid into an irreversible revenue account before issuance of passport for example. The next thing is to ensure that the utilization is optimal.
Is the economy good enough for the private sector to thrive?
No and Yes. No, because the Nigeria environment has some endemic negative effects for doing business: the cost of borrowing is high, and the infrastructure is very weak. There is insecurity especially in the north. But the government can improve on the infrastructure, particularly on power; then articulate policies in such a way that genuine SMEs can get loans at single digits. The former governor of the CBN started it through the N800 billion intervention funds for SMEs, power/aviation and commercial agriculture loans but it is not enough. The present governor of the CBN has talked about articulating novel policies to improve the SMEs, development of the private sector and getting cheap access to loans with multiplier effect of creating wealth, improving income and reducing unemployment etc. Since the new CBN governor assumed office, he has been battling crisis of addressing issues of liquidity management and naira exchange rate stability in the face of depleting reserve and oil price shock with National election around the corner. Hopefully by the time oil price as well as naira exchange rate stabilize around second quarter, his development policies will begin to be pushed and positive impact also felt.
Yes, because an economy is driven mostly by private sector. Nigeria is endowed with human and natural resources, with security, good infrastructure and low cost of borrowing, the private sector has the capacity of fully driving the economy.