- Growth projections by the IMF and World Bank put Nigeria’s Q2 GDP at 3.2 %, can you share your thoughts on this?
Nigeria is currently rated ‘B-’ by Fitch on the back of a favourable public debt/GDP ratio, size of the economy, growth rate, domestic debt market liquidity and large oil & gas reserves. Nonetheless, the positive outlook is also constrained by weak governance, security challenges, high inflation at 22.41%, very low non-oil revenue, high hydrocarbon dependence and weakness in the exchange rate framework. There is cautious optimism on the GDP outlook for Nigeria because of the reforms under the new administration resulting to the elimination of oil subsidies, exchange rate unification and a more flexible exchange rate regime, although there is still sizeable uncertainty around the policy agenda of the new administration.
Oil production picked up from last year’s lows and I think the domestic debt market has sufficient capacity to compensate for severely constrained access to Eurobond financing. However, higher debt servicing costs and inflationary constraints to continuing deficit monetisation present risks to public finances. Bearing these factors and how the metric has played out in the past, I think the Q2 GDP will most likely hover around 2.8%.
- The May inflation rate released by NBS showed 22.41% from 22.22% in April 2023, how do investors explore a market with this rate hike?
The current inflationary trend is not peculiar to Nigeria, record high inflation rates have been witnessed across major economies of the world largely due to disruption of supply dynamics because of the Ukraine-Russia conflict which started in Q1 2022.
For context, the inflation rate in the United States of America touched an unprecedented level of 9.1% in June 2022 before slowing down to 4.05% in May 2023 while United Kingdom’s inflation rate got to as high as 11.1% in October 2022 before gradually easing to 8.7% in April 2023.
It is pertinent that investors prepare for inflationary periods because it defines price stability and avoids panic. By having a structure to protect funds from inflation, more capacity is built to weather the market volatilities, especially for long-term investments.
Despite these inflationary trends, investors continue to adopt a portfolio approach to investing, to weather the storm and reduce investment value erosion. In terms of investment objectives and risk profile, Nigerian investors are getting smarter. A handful is allocating a percentage of their portfolio to stocks that have the twin advantage of good fundamentals and attractive (double-digit) dividend yields in the equities market. Others are taking advantage of high yields in the money market space to minimise negative real returns on investment; an estimated over N507 billion worth of commercial papers have been issued in Q1 2023 most of which offered decent interest rates.
Finally, there is now increasing exposure to alternative assets such as real estate, foreign-denominated investments, private equity, commodities etc.; some of these alternative assets are not common in Nigeria. However, they offer decent returns on investment as well as diversification benefits due to their lower correlation to traditional assets like public equities and fixed-income instruments.
- Nigerian economy lost its bite with high cost of funds at 18.5%, almost crowding out the private sector, how do we resuscitate real sector funding for wealth creation?
The real sector is a prime driver of economic progress. My belief is that beyond direct funding, the real sector must be supported with the right policies. The new government should take steps to reassess the existing framework within which the real sector operates. If this is achieved, the economy will flourish. If the framework is frail or incomplete, then the real sector will struggle.
For our industries to thrive, there is a growing need for inputs to serve the growing population, many of which are agriculture based. The last administration invested heavily in agriculture, providing loans, and expanding the country’s total area of cultivated land for crops, livestock, and fisheries. The new administration must take steps to promote vibrant commodity exchanges that will guarantee minimal pricing for produce.
Building on this foundation, the leadership must accelerate faithful implementation of the ‘infrastructure master plan’ by adopting proven financing structures till it delivers an acceptable stock of hard infrastructure through seaports and airports; road, rail and water transportation linkages that can support private sector growth.
Fixing the perennial problem of energy supply must be deliberate. It is almost impossible for Nigeria’s ambitions for itself to be achieved without solving the problem of how to provide energy to homes and businesses across the country.
The action plan going forward is to improve the enabling environment, further decentralise transmission, and deliver cost-reflective tariffs to attract more private investment in the sector.
The current administration must urgently address fiscal, monetary, and trade reforms to effectively increase domestic production by accelerating inclusive growth and job creation across Nigeria. With an expansion in domestic output and growth in export, the country can gain further access to foreign exchange and make the same accessible to local importers of secondary inputs and machinery.
- Nigeria’s debt has grown almost 511 percent under Buhari, with debt to GDP ratio at 32%. how best can the new administration manage its impact on the economy?
Personally, I do not embrace the conventional wisdom that fiscal deficits by the national government are inherently bad. All governments, especially in this era of fiat currency, run secular budget deficits. This is an inherent part of modern governance. The most powerful and wealthiest governments run deficits, as do the poorest nations.
A budget deficit is not necessarily bad. Look at the Japanese example with high government borrowing and low inflation. The United States, United Kingdom, Japan, China, and India have significant amounts of national debt, with the US having the largest at over $31.46 trillion. Nigeria is facing economic challenges due to its high levels of government debt, which has led to a stunted GDP growth rate, slowing export growth rate, reduced income per capita, and increasing poverty levels. The real issue is whether deficit spending is productive or not. Unproductive deficit spending is a compound negative, especially if backed by excessive borrowing of foreign currency. This is not classroom economics, but it is the lesson of the real economic history of nations.
To salvage budget deficit and attendant borrowing implication, fiscal policy will be the main driver. Monetary policy is weaker and a less effective instrument, bad monetary policy is, of course, destructive. Even good monetary policy cannot carry the load the fiscal arm can. Thus, the government must steadily remove itself from the fiction of tying the budgets to dollar denominated oil revenues and expand the economic revenue base rather than engage in perpetual borrowings.
Given the importance of managing government debt in Nigeria, it is crucial that the current administration adopts proactive debt management strategies. Some of the measures that can be taken to manage the country’s debt levels include:
- Adopting fiscal discipline. This means fiscal policies that aim to balance government spending and revenues. This can be achieved through measures such as increasing tax revenues by expanding the tax base, reducing wasteful spending, and improving the efficiency of government programmes.
- Implementing prudent monetary policy measures that aim to control inflation and manage interest rates. This can be achieved through measures such as controlling the money supply and maintaining a stable exchange rate.
- Developing a debt management plan that aims to reduce the debt-to-GDP ratio over time. This can be achieved through measures such as reducing government spending, increasing tax revenues, and attracting foreign investment.
- Ensuring that debt is used to finance productive investments that have the potential to generate returns and improve the standard of living for Nigerians.
- Increasing transparency and accountability in government debt management and ensuring that the public is informed about the country’s debt levels and management strategies.
- Nigeria is servicing its debt with almost 100% of its revenue, how do we enable private capital to contribute more to the economy?
There is no better time that Nigeria needs to unlock growth in the economy than now when the noose is being tightened around its neck by the twin evils of high interest rate and inflation, which, respectively, have crimped income and impeded the value of whatever is available. This makes it necessary, if not imperative for the country to seek ways of promoting and catalysing investment of private capital in the economy to unlock growth, which the economy lacks because of the prevailing situation.
Over the years, the country has followed passionately a government-based expenditure model while the “defend the naira at all costs” obsession of the Central Bank of Nigeria (CBN) has only encouraged hot money investments, with little or no incentive for patient capital. This has not amounted to much in closing-up investment gaps in almost all sectors of the economy. For example, Nigeria’s fiscal deficit to GDP at a 3-year average is -5.6, a very negative growth driver outcome. However, the federal government in synchronization with the private sector, can agree on the right economic philosophy and put in regulations that perfectly align with this philosophy. This mutual motive can and will produce a combined effect greater than the sum of their separate effects.
Before now, we did not have such synergy and have suffered a less competitive capital market when compared to others in the global space in terms of attracting private capital.
Though foreign investors do not doubt opportunities in the Nigerian capital market, they will not take long-term chances due to Nigeria’s weak legal frameworks, unfavorable market philosophies and unprofitable government regulations on the private sector. And that, in our view, is the crux of the matter.
- Nigerian economy has had its own turn of being affected by the Russian-Ukraine invasion, what can we do differently to attract private capital in our oil and gas sector?
Attracting foreign direct investment is a major responsibility of the government as they help to create jobs, boost transfer of skills, and ensure exchange rate stability. When accompanied by sound domestic policies, foreign investment can help create jobs, trigger human capital formation, and bring new technologies and managerial practices. It can also contribute to international trade integration, foster innovation among local firms, and encourage a more competitive business environment.
Nigeria can attract private capital into the industry by creating attractive industrial hubs, improving the business environment, and stabilising the currency. Widespread corruption, lack of transparency, security issues, import restrictions and poor quality of infrastructure are limiting the country’s foreign direct investment. The government must deliberately address these. Intense bureaucracy also curbs private investment in the sector. The country’s underdeveloped power sector also forces most businesses to generate a significant portion of their own electricity.
- Most upbeat investors are seeing high hopes in Nigeria, amid concerns of policy inconsistency how does the government explore the opportunities?
For Nigeria to attract investors, it must create the right environment and appropriate fiscal incentives to out-compete currently preferred destinations of foreign capital like China, India, and Vietnam, among others. Private capital will ordinarily be attracted to a country with a stable macro-economic policy environment with low or moderate inflation, stable interest rates, stable or predictable exchange rates, easy access to foreign exchange and minimal capital controls.
Investors gear their foreign direct investments toward economies where they have the highest potential for profit and the least risk. As such, the dent of the social unrest to the image and perceived risk of long-term capital investment would mean that the country will struggle in attracting the much-desired long-term finance needed for accelerated growth and enhanced job opportunities. There is a need to reform the foreign exchange market to inspire investors’ confidence and address the challenges of insecurity and logistics. There is a need for creative support for small businesses to promote economic inclusion. We must accelerate efforts to ensure domestic refining of petroleum products.
Our fiscal reforms must prioritise infrastructural development and transparency in the budgetary process. We must take urgent steps to tame inflation and boost the purchasing power of the citizens. Identify sectors of the economy and create the appropriate policies that would open the sectors to private investments, just as we have done in the telecommunications sector.
- The Nigerian government has ushered in a new administration, what are the key suggestions you are giving to the incoming administration?
The starting point is macroeconomic and fiscal stability. Unless the economy is revived and fiscal challenges addressed boldly, resources to develop will not be there. Nigeria currently faces huge fiscal deficits, and this has been due to huge federal and state government expenditures, lower receipts due to dwindling revenues from the export of crude oil, vandalism of pipelines and illegal bunkering of crude oil.
According to Nigeria’s Debt Management Office, Nigeria now spends 96% of its revenue servicing debt, with the debt-to-revenue ratio rising from 83.2% in 2021 to 96.3% by 2022. The world bank predicts that this number will worsen over time if not checked. Some will argue that the debt to GDP ratio at 35.3% is still low compared to other countries in Africa, which is correct; but no one pays their debt using GDP. Debt is paid using revenue, and Nigeria’s revenues have been declining. Nigeria earns revenue now to service debt—not to grow.
Support should be given to private sector refineries and modular refineries to allow for efficiency and competitiveness to drive down fuel pump prices. The newly commissioned Dangote Refinery by former President Buhari—the largest single-train petroleum refinery in the world, as well as its Petrochemical Complex—will revolutionize Nigeria’s economy.
There is an urgent need to look at the cost of governance. The cost of governance in Nigeria is way too high and should be drastically reduced to free up more resources for development. Nigeria is spending very little on development.
Today, Nigeria is ranked among countries with the lowest human development index in the world, with a rank of 167 among 174 countries globally, according to the World Bank 2022 Public Expenditure Review report.
To meet Nigeria’s massive infrastructure needs, will require $3 trillion by 2050. At the current rate, it would take Nigeria 300 years to provide its minimum level of infrastructure needed for development. All living Nigerians today, and many generations to come, will be long gone by then. We must change this, Nigeria must rely more on the private sector for infrastructure development, to reduce fiscal burdens on the government.
Much can be done to raise tax revenue, as the tax-to-GDP ratio is still low. This must include improving tax collection and administration, moving from tax exemption to tax redemption, ensuring that multinational companies pay appropriate royalties and taxes and that leakages in tax collection are closed.
However, simply raising taxes is not enough, as many question the value of paying taxes, hence the high level of tax avoidance. Many citizens provide their own electricity, sink boreholes to get access to water, and repair roads in their towns and neighbourhoods. These are essentially high implicit taxes. Nigerians, therefore, pay the highest ‘implicit tax rates’ in the world.
Governments need to assure effective social contracts by delivering quality public services. It is not the amount collected, it is how it is spent, and what is delivered. Nations that grow better, run effective governments that assure social contracts with their citizens.
We must rebalance the structure and performance of the economy. A very common refrain in Nigeria, with every successive government, is “We need to diversify the economy.” Nigeria is one of the most diversified in Africa, with the oil sector accounting for only 15% of the GDP, and 85% is in the other sectors. Nigeria’s challenge is not diversification. Nigeria’s challenge is revenue concentration. This is because the oil sector accounts for 75.4% of export revenue and 50% of government revenue. The solution, therefore, is to unlock the bottlenecks that are hampering 85% of the economy. These include low productivity, very poor infrastructure and logistics, epileptic power supply, and inadequate access to finance for small and medium-sized enterprises.
Nigeria must also shift away from the import substitution approach to export-focused industrialisation. Nations do not thrive through import substitution; they thrive from export-bound industrialisation.
For faster growth, Nigeria must decisively fix the issue of power, once and for all. There is no justification for Nigeria not having enough power. Nigeria’s private sector is hampered by the high cost of power. Providing electricity will make Nigerian industries more competitive when compared to other African countries like Kenya and Egypt. With the support of the African Development Bank, Kenya, under President Kenyatta, was able to expand electricity access from 32% in 2013 to 75% in 2022.
Today, 86% of Kenya’s economy is powered by renewable energy and in one project—the Last Mile Connectivity Project—the Bank’s support allowed Kenya to connect over 2.3 million poor households to electricity—that is over 12 million people provided with an affordable connection to grid power.
In 2014, Egypt had an electricity deficit of 6,000 megawatts, but by 2022 it had 20,000 megawatts of surplus power generation capacity.
Nigeria should invest massively in renewable energy, especially solar. The African Development Bank is implementing a $25 billion Desert-to-Power programme to provide electricity for 250 million people across the Sahel, including the northern parts of Nigeria.
For inclusive development, Nigeria must completely revive its rural areas. Nigeria’s rural areas are forgotten and have become zones of economic misery. To revive and transform these rural economies, we must make agriculture their main source of income, a business, and a wealth-creating sector. To be clear, agriculture is not a development sector. Agriculture is a business, the development of Special Agro-industrial Processing Zones will transform agriculture, add value to agricultural value chains and attract private sector food and agribusinesses into rural areas. Special agro-industrial processing zones will help turn rural areas into new zones of economic prosperity and create millions of jobs.
The African Development Bank, Islamic Development Bank and the International Fund for Agricultural Development are currently supporting the implementation of a $518 million Special Agro-Industrial Processing Zones programme in seven states and the Federal Capital Territory.
Nigeria’s best asset is not its natural resources but its human capital. We must invest heavily in human capital to build up the skills Nigeria needs to be globally competitive, in a rapidly digitised global economy. We must build world class educational institutions, and accelerate skills development in science, technology, engineering, mathematics, ICT and computer coding, which will shape the jobs of the future.
There is an urgent need to unleash the potential of the youth. Today, over 75% of the population in Nigeria is under the age of 35. This presents a demographic advantage. But it must be turned into an economic advantage. Nigeria must create youth-based wealth.
We must move away from the so-called “youth empowerment programmes.” Youths do not need handouts, they need investments. The current banking systems do not and will not lend to the youth. Special funds, while palliative in approach, are not systemic and are also not sustainable. What’s needed to unleash the entrepreneurship of the youth in Nigeria are brand new financial ecosystems that understands, values, promotes and provide financial instruments and platforms for nurturing business ventures of the youth at scale.
