The prevailing economic situation is prompting the federal government to work harder to further diversify the economy as well as the country’s revenue base.
A recent study by the International Monetary Fund (IMF) showed that the significant and prolonged drop in oil prices since mid-2014 has changed the fortunes of Nigeria and many other energy-exporting nations around the world. This, finding from the report that budgets in oil exporting nations have generally turned from surpluses to large deficits, growth has slowed, and financial stability risks have increased.
The report stressed that in such a challenging environment, a policy of “business as usual” will not suffice–policymakers will need to adopt significant measures to put public budgets on a sounder footing, address risks to liquidity and the quality of assets in the financial sector, and improve growth prospects.
“This will be a difficult long-term process, but the good news is that many countries have made a strong start, especially in terms of budget policies,” it stated.
However, the report pointed out that in the coming years, oil revenues will no longer be sufficient for governments to act as the main employer of their fast-growing young populations.
Therefore, it urged policymakers to find new ways to promote private sector development and help their economies diversify away from oil.
Therefore, for Nigeria, which is heavily dependent on oil revenue, there is need for the government to pursue genuine economic diversification policies to as to take the economy out of the doldrums.
But the Director General, Debt Management Office (DMO), Dr. Abraham Nwankwo, believes that with the steps taken so far by the government towards refocusing the country’s source of revenue, the economy would no longer be susceptible to events in the international crude oil market in few years’ time.
Following the drop in crude prices from a peak of $114 per barrel in July 2014 to as low as $33/barrel in January 2016, the country’s reserves have suffered great pressure from speculative attacks, round tripping and front loading activities by actors in the forex market. This fall in oil prices also implied that the Central Bank of Nigeria’s (CBN) monthly forex earnings has fallen from as high as $3.2 billion to current levels of as low as $1billion. Yet, the demand for foreign exchange by mostly domestic importers has remained unabated. The net effect of these combined forces unfortunately is the depletion of the country’s forex reserves and pressure on the naira.
Despite the challenges faced by the economy presently, Nwankwo has described the situation as temporary setback that will be overcome when the government’s policy on diversification of the economy begins to crystalize.
Speaking at a recent forum in Lagos, the DMO boss said efforts at stimulating the non-oil sectors such as agriculture, solid minerals and manufacturing, among others, will impact on the economy in the next three to five years. According to Nwankwo, when the economy is diversified, Nigeria’s growth will no longer be determined by the prices of crude oil.
The DMO boss said much revenue would be derived from taxation, adding that the country’s low comparative tax revenue to the Gross Domestic Product (GDP) ratio, currently at about seven per cent against the 18 per cent average in most developing countries, will improve following efficient production.
He said through taxes, government can secure the fund to finance major developmental projects that will impact on the people’s lives.
Nwankwo added: “The target of getting the country to rank among the 20 leading economies in the world by 2020 is still being pursued. The crash in crude oil prices should not in any way derail that target. When you are running a race and something trips you and you fall, you have to wake up, and continue the journey. Also, even if oil is the base for economic growth and development, it was an inappropriate base for growth. But luckily for the country, there are alternatives in agriculture.”
The DMO chief said the country has been unable to exploit up to 25 per cent of opportunities in agriculture.
“We need to achieve internal food security and have the opportunity to export agro-based products in processed form. Imagine the variety of food stuff from savannah to the deserts, all the various legumes, roots and others that can be grown from these environments. If we effectively exploit agriculture, if and as we are making progress in agriculture, firstly, the major consumer of our forex like agro-based raw materials, rice, fish, poultry, wheat, will be taken care of and government will save billions of dollars from these imports.
“We have the capacity to produce these products and even export to other countries. Based on the pronouncements of the agriculture minister based on the vision of President Buhari, in three to four years, we will be self-sufficient in poultry, rice production. We are on the right path to be self-sufficient in food, and enormous forex will be saved from agriculture production alone. Reserves will rise, and the local currency will be stronger. That is the essence of the growing economy.
“You can see that in the manufacturing sector, some factories are operating below capacity. But with the on-going implementation of President Muhammadu Buhari’s policy on diversification of the economy and revitalizing the power infrastructure, the sector will pick up and create more jobs for the people,” he said.
Revamping the Economy
On her part, the Minister of Finance, Mrs. Kemi Adeosun, recently revealed that the government plans to reset Nigeria’s economy with structured borrowing, targeted investment and diversified growth. Adeosun also said part of the cash set aside to finance some energy projects would be used to help fund the budget.
Pointing to the impact of falling oil prices on the economy, the minister said: “In the past, we had the means but not the will. Now we have the will but we no longer have the money to invest. The safety blanket of oil has been ripped away, laying the poverty of Nigeria’s institutions bare.”
She added: “We have spent too many years tinkering at the edges of our institutions, our infrastructure and our economy and the mistakes and misjudgement of the last 40 years have set our clocks back by decades.
“We must collectively adopt a blueprint that equips the future generations to be creative and dynamic, that allows us to articulate a vision of a Nigeria, with a strong educational foundation; rich in depth of knowledge with a breadth of skills, an expansive infrastructure capable of servicing the needs of a nation of 150 million Nigerians.”
On the N1.8 trillion borrowings to invest in railway transportation, roads, housing, power and health, the minister said: “We are committed to a counter cyclical budget expenditure model. This has been a success in other nations, offsetting the risk of recession and creating an economy which is not based on either fragile consumer spending or over-reliance on oil.”
Adeosun also set out what she described as the four pillars of the economic plan: stimulate economic growth to achieve a real GDP growth of 4.2 per cent in 2017; reduce the cost of governance and strengthen institutions to combat corruption and extract efficiency in public service; increase government expenditure on infrastructure; and fund the budget deficit and negative trade balance cost effectively.
She said the targeted outcomes would include a substantial increase in gross capital formation; acceleration of GDP growth; infrastructure development to unlock economic growth; diversification of the economy and growth of the non-oil sector; an improvement in the overall business environment; and improvement in key socio-economic indicators, jobs and wealth creation.
Last week, the minister led a team of government officials to meet bond investors in London.
Continuing, Nwankwo disclosed that funds to be borrowed to support the 2016 budget would be committed mainly to capital projects funding.
He said this is the only time that such huge amount is allocated and specified for capital projects. “This is the first time that the budget specified that all borrowed funds will be for capital expenditure. The sharing of internal and international borrowing is almost 50/50. We have been borrowing locally, but we have to take advantage of the relatively low cost of funds externally. We do not want to borrow too much from the domestic economy, so that we do not crowd-out the domestic environment,” he said.
He said achieving self-sufficiency in power will enable government generate more income; companies will be able to pay more taxes, thereby helping government diversify its revenue bases.
“It is possible that in the next five to seven years, the whole picture of Nigeria will be a complete turnaround because of government’s economy diversification plan. The difference between Nigerian and other countries facing similar economic challenges is that those countries do not have the same opportunities we have in Nigeria. Nigeria is near 100 per cent idle capacity, meaning the flexibility to grow the economy is high,” he said.
He urged Nigerians not to be depressed as a result of the drop in crude oil prices, saying: “We have no reason to be depressed just because crude oil price is down. We have to see the varieties of opportunities available for the country to grow the economy based on a well-diversified and sustainable manner. We as responsible stakeholders in the economy, should emphasis these opportunities.”
“Indeed in other countries, the major source of revenue is taxation. Taxation should also be explored. Government should be able to sustain itself with taxation revenues. Now with the better tax compliance, and effective sanctions for defaulters, we have a room to boost public revenue from taxation.”