Nigeria is going through an economically-challenging period due to the fluctuation in the price of crude oil and the fall in the country’s currency. This has led to the new administration struggling to keep the country’s head above water and fulfilling its campaign promises.
In this article, Kemi Adeosun talks about Nigeria’s economy, the problem the country is going through and how it got there in the first place. She touches on the issue of oil and the new direction the country will take to make the economy good.
The genesis of our problem
Writing this, my third article on the economy, I’m keenly aware that the question Nigerians want answered is: What is government doing to address our economic challenges? The first thing to state is that there are no quick fixes, but our strategy is clear and the expected outcomes are pretty compelling.
Our immediate economic imperative is to provide a Keynesian stimulus to reflate the economy. The 2016 focus is underpinned by a desire to radically reposition Nigeria’s economy. This administration believes very strongly that the previous direction was far from optimal. We are pursuing a fresh direction consistent with our belief in building a resilient economy.
The strategy itself is worth reiterating. The 2016 Budget is being debt funded and the borrowings are targeted at the financing of capital projects to address the infrastructure deficit, create jobs and build the platform for optimisation of the non-oil economy that will see Nigeria prosper.
To this end, we have commenced an aggressive programme of fiscal housekeeping: increasing revenues and reducing recurrent expenses. This will ensure that we move towards our objective of financing recurrent expenditure from revenue, rather than borrowing as obtained before now.
Oil and the role it will play
In addition, we have signalled through our financial decisions that we are moving away from oil. Government investment in oil will be limited. We are inviting private sector participation in the funding of cash calls for our Joint Ventures rather than tapping the Federation Account.
This is guaranteed to improve our cash flow. As I have stated previously, oil is important but oil is not enough. Therefore, if faced with an option to invest borrowed funds in our railways or power or fund oil cash calls, we will strategically fund non-oil.
This is in the knowledge that there are private sector solutions to the funding needed for oil, but few sources other than government for investment in physical infrastructure.
The debate about whether Nigeria should borrow is well-intentioned and cannot be dismissed without a careful analysis, given our antecedents as a nation. I am in agreement with those who argue that Nigeria should not borrow simply because its debt to GDP level is low enough to accommodate such borrowing.
There must be a clear business case backed by justifiable benefits. I believe that Nigeria has such a case at the present time. Simply put, we need capital investment to grow our economy. At 13 per cent debt to GDP, we compare favourably with the threshold of 30 per cent for developing economies.
Our low debt to GDP ratio is not exactly a positive attainment because it is accompanied by critically low level of infrastructure investment. It is actually a false economy. Low capital formation is a risk which, if uncorrected, hinders future economic growth and this is already evident.
The issue of borrowing
Borrowing, as we propose, will increase debt to GDP to 16 per cent and still leave us significantly lower than our peer group including Ghana at 70 per cent, South Africa at 50 per cent (2015) and Angola at 31 per cent (2014).
Appropriate levels of fiscal deficit have been used to grow many of the most successful global economies. As ours develops, our sources of revenue will grow, diversify, and become less susceptible to external shocks. Our need to borrow will reduce accordingly.
It’s important to note that capital spending creates an asset, and this gives a return over time in the form of growth. Infrastructural projects such as rail and roads create jobs, generate taxes and stimulate further spending.
This is the economic multiplier effect that capital spending brings. Therefore, while an increase in public spending may create a deficit in the short term, the resultant increase in productivity will lead to a higher rate of economic growth and greater tax revenues. According to the International Finance Corporation, for every $1bn invested in infrastruc
Our borrowing policy will remain conservative and will see us access the lowest available funds, hence our decision to approach multilateral agencies in the first instance, for budget support at concessional rates as low as 1.5 per cent per annum.
We have also secured commitments from export credit agencies that are tied to specific capital projects including key initiatives in power, transport and other infrastructure, and at semi-concessional rates. The balance will be sourced commercially to create a blended cost of capital that’s as low as possible.
We are addressing the relatively high debt service to revenue ratio which saw 28.1 per cent of our 2015 revenues devoted to debt. This will be done through a systematic restructuring of inherited debt portfolio into a profile that is aligned with our medium term outlook as well as an increase in our revenues.
The new direction to making Nigeria great again
Borrowing is not our primary focus. Increasing our Internally Generated Revenue is critical because it is sustainable; and because much of the funds collected went unremitted to government – something we are tackling now.
Our Revenue Team holds daily revenue sessions with the MDAs during which clear targets are set and agreed; monitoring and evaluation are continuous. We are deploying cashless revenue collection processes in our high earning agencies to ensure maximisation of our receipts. We are working through the Treasury Single Account balances with a view to identifying monies that can potentially be used to fund the budget and reduce borrowing.
Other costly leakages are being blocked. We have completed a detailed review of tax and duty waivers and discovered that in some cases, Nigeria lost significant revenues and with limited benefits. We are set to begin consultations with stakeholders on a revised policy aligned with the best interests of Nigeria.
Furthermore, we are identifying funds that can be released from hitherto untapped sources, including idle and underutilised government assets that have commercial potential including real estate.
To this end, Ministry of Finance Incorporated is to become a professionally operated asset manager, rather than a passive holder of government assets. It will be actively managed to “sweat” Nigeria’s very valuable global asset portfolio.
This will generate earnings and constitute additional budget funding. Gradually and with the requisite safeguards, we will authorise the investment of part of the estimated N6tn currently held in pension funds into key infrastructure that will provide workers with higher returns on their pension funds while enhancing capital formation and economic growth. Nigeria’s first ever Project Tied Infrastructure Bonds are being designed.