By David Edevbie
TUE, FEBRUARY 14 2017-The Federal Government through the Ministry of Budget and National Planning is currently in the process of developing a National Economic Recovery and Growth Plan (NERGP). The plan targets key economic and social issues for the coming three years. The plan sets out a comprehensive agenda on monetary and fiscal policies, economic diversification, competitiveness and growth, as well as social cohesion, job creation, improved governance and combating corruption. The plan presented to the state governors on 15th December 2016 sets out an ambitious GDP growth target of 7% by 2020. This comes against the backdrop of the Nigerian economic downturn in 2015 and subsequent recession in 2016 for the first time in over 20 years.
Will the plan succeed? What will the implementation of the plan portend for the Nigerian economy and its people? Whilst a welcome development, many would argue that it should have been in place much sooner.
The NERGP proposes several initiatives to identify and harness potential revenue sources that will address the growing fiscal budget deficit. It sets out goals to reform varying economic sectors that will not only take the country out of recession but that will foster long term sustainable growth.
Other goals such as the desire to achieve better governance are of great significance and should be pursued aggressively. A related goal, is the reduction of public expenditures on what is considered a bloated and inefficient civil service. It is no secret, that many government ministries, departments and agencies (MDA’S) are over-staffed and that a process of staff rationalization is needed to reform and improve efficiencies within the civil service.
Equally important are the overdue plans to improve the management of the MDAs, the eradication of ghost workers and the implementation of e-government initiatives. Over time, these changes should lead to a much-needed redirection of funds away from recurrent to capital expenditure which is required at all levels of governance.
The NERGP anti-corruption and transparency plans are also encouraging. Amongst other measures, the NERGP envisages the establishment of whistle-blower hotlines, incentivizing the reporting of corrupt officials and enhancing centralized identity management. If implemented successfully, these initiatives will be incredibly beneficial. However, the Federal Government must also show a real commitment to addressing corruption issues in an unbiased and non-partisan manner with clearly defined and measurable targets.
An effective whistle-blowing policy can only be sustained when protection of whistle blowers is institutionalized by enactment of relevant laws. The US had a Whistle-Blower Protection Act, enacted in 1989 with similar laws enforced in Japan, South Korea, Iceland, South Africa, Brazil, and most recently, India. Therefore, a bill to this effect must be submitted to the National Assembly and given expeditious priority in hearings, debates and eventual passage into an Act.
Another positive objective of the NERGP is the desire to take a decision to move from the current fixed exchange rate regime to a regime of flexible exchange rates. While this is likely to improve Nigeria’s export competitiveness, it will not be without significant costs. In the short and medium term, it is likely to lead to a further significant devaluation of the Naira, which will worsen the already rampant inflation and place further stress on the import-dependent and consumption-oriented Nigerian economy.
Low productivity in much of Nigeria’s non-oil export sectors makes it difficult for Nigeria to benefit from a further devaluation of its national currency at this time, so any move to a flexible exchange rate regime must be carefully managed. Undoubtedly, this is an inevitable outcome of the faulty foreign exchange management policies pursued over the last 18 months by the Central Bank of Nigeria (CBN).
The earlier decision to delay devaluing the naira coupled with an opaque foreign exchange rationing system made a bad economic situation even worse. Over the period in question, many businesses struggled to secure foreign exchange to pay for essential imports, leading to a cooling effect on the entire economy that ultimately led to its contraction. This was further exacerbated by uncertainties in the market that impacted negatively on foreign investment flows resulting in net outflows. In the light of current macroeconomic instability, the planned adjustment of the foreign exchange policy needs to be supported with the elimination of the rationing system that distorts the market while fiscal and monetary policies must be synchronized to rein in inflation that hit 18.55 per cent (year-on-year) in December 2016. Monetary tightening and bringing inflation under control are now absolute prerequisites to sending the exchange rate into full float.
A worthy initiative is the proposal to establish a Delivery Unit to drive implementation of the NERGP. Historical evidence suggests that implementation of major reforms is better served with a small and efficient task force, staffed with the best professionals in their fields. It is important that staffing of the task force should be established on merit and not on a “job for the boys” basis. The unit should submit regular reports to the President and spearhead the reform process by streamlining the implementation of the plan initiatives by the MDAs. Mishandling of this critical step could stall and even derail the entire reform process.
The NERGP proposes the expansion of social safety net programs. As Nigeria currently ranks low on poverty and inequality, expanding the social safety net is an important goal in addressing this problem. The plan proposes conditional cash transfers (CCT’s) as a major tool of achieving this goal. CCTs have worked well in countries in Latin America, Asia and even in Africa (Ghana, Malawi, Uganda etc.). However, the peculiarities of Nigeria’s demography, the determination of a meaningful amount derived from empirical study rather than political rhetoric and the costs of these transfers need to be taken into consideration and weighed against the possible benefits of the program.
The NERGP goal of increasing customs and excise revenues by reducing leakages is desirable. The introduction of a single window for duty collection has proved effective in neighboring countries such as Ghana. However, implementing this reform will require strong political will should it be met with resistance from devious importers and colluding customs officials trying to circumvent payment of full and accurate duties. The policy may also have the unintended effect of raising the costs of customs clearance, which will affect the competitiveness of Nigerian ports. It is therefore critical that the government keeps track of achievements in the reduction in known leakages such as importation of vehicles through land borders. In these circumstances, if the Nigerian Customs Service is able to indicate and make comparison in their volume of car imports and revenue collection on the imports through the ports alone in Q1 2017 as compared with Q1 2016, this could provide a good indication on the policy’s ability to address revenue leakage in duty collection. In this regard, this can then serve as a template for further policy direction. Especially in clearly identifying that all possible revenue leakages in duty collection are clearly identified, plugged and documented through appropriate policies and processes.
The NERGP also targets agricultural transformation and the acceleration of the Nigeria Industrial Revolution Plan (NIRP) with a focus on agri-processing and industrial hubs. Nigeria has a high potential for agricultural output but current agricultural productivity is very low. Intensification of agricultural output through increased early and effective distribution of farm inputs such as fertilizers and provision of better extension programs should be the key to boosting productivity. However, there should be major reforms in land and property rights that are critical to boosting the low agricultural productivity. Experts at the 11th African Economic Conference held in Abuja in December 2016, identified how improvements could be made in this area by providing improved land rights to women since they contribute massively to agricultural productivity in many nations such as Nigeria. Land reforms should also move towards enabling land owned by smallholder farmers to be used as assets that can be collateralized in securing credit.
Similarly, the plan to further boost agricultural output via construction of major agri-processing hubs should lead to improvement in the agriculture value chain and give more value for farm produce to the farmers. However, recent studies show that it is far more difficult to promote clusters in developing countries than in developed ones. In addition, establishing more export-processing zones may not be a desirable pathway (see http://www.fao.org/docrep/012/i1560e/i1560e.pdf). In addition to significantly eroding tax revenues derived from agri-business, they may block the advancement of a sizeable local market for processed agricultural products. It should be recognized that there is a significant local market for processed agricultural products in Nigeria. So, the focus for creation of these agro-processing and industrial hubs should be not only for the export market but the local market as well.
When it comes to policy initiatives, the trend in Nigeria has been for new governments to jettison the initiatives of previous administrations, be they good or bad. This plan to improve agricultural output is one example where a departure from this practice must be made. The Federal Government should be able to harness the positive aspects of the truncated land reform program of the Yar’Adua administration and the agricultural transformation program of the Goodluck Jonathan administration and include these as part of the agricultural growth plan of the NERGP.
There are aspects of the NERGP that have good intentions but lack specifics and in my opinion, require further work before implementation. For example, the plan to improve Nigeria’s rank in Ease of Doing Business from 169 (2017) to the top 100 by 2020 needs to be articulated with better clarity. Though Nigeria needs to improve its attractiveness to investors, the plan is devoid of specifics on how it intends to achieve this goal. Ease of Doing Business initiatives have been implemented in Lagos and Delta States with encouraging results and these programs can provide a template, with specific targets and measurable milestones, on which the Federal Government can articulate its Ease of Doing Business initiative to investors, policy makers, development partners and the Nigerian public.
Another good NERGP goal that currently appears to lack specifics is the desire to leverage public-private partnerships (PPPs) to invest in infrastructure projects. Attracting private capital to finance critical infrastructure projects is important to stabilize the country’s budget and improve economic growth. However, the plan needs to elaborate clearly how this will be done to stimulate private interest in PPP infrastructure investment. There must be a demonstrable will to respect the sanctity of contracts entered into by government. Unguarded statements from public officers in both the executive and legislative arms threatening to revise or cancel the privatization programme of the power sector concluded by the previous government send the wrong messages to potential investors, making the PPP initiatives risky and uncertain.
The plans to improve capital expenditure spend through portfolio and project optimization is a worthy goal, but is not clearly explained. Optimizing capital expenditures by prioritizing projects, balancing risk and return, and optimizing the design of projects is not unreasonable, but requires more specificity. It is also not clear whether prioritization of capital expenditure projects will be based on a set of objective and transparent criteria or as usual be based on opaque political considerations. For instance, when considering the cry of marginalization by certain geo-political zones when it comes to capital expenditure projects, how does the Federal government intend to achieve a geo-political balance in the implementation of its capital expenditure spending?
Another goal that could be difficult to realize is the promotion of the ICT sector and creative industries. ICT has produced the most significant productivity gains over the last half century and is rightly viewed as one of the engines of growth for many now-developed economies. To showcase the value of ICT to a country’s GDP, I take the case of India where ICT contribution to GDP has increased from 1.2% in 1998 to 7.5% as at 2012. According to NASSCOM, sector aggregated revenues from ICT in India stood at $147billion in 2015, with $99billion of this amount coming from ICT exports. Strengthening the ICT sector in Nigeria can kick-start the economy. The idea of investing in the development and deepening of broadband Internet in Nigeria is commendable. However, this policy requires major investment in human capital (IT experts) and significant reforms in the education sector to increase aggregate investments in the sector. This may be difficult to implement over the short to medium term and it will require proper consultation with industry experts to move this initiative forward.
Other goals that appear to be either unclear, overly optimistic or require specifics, include the plans to (i) increase independent revenues of MDAs (ii) boost direct job creation through the public works programs (iii) reduce the skills gap to improve the employability of labor (iv) implement key environmental projects and (v) accelerate progress on the Presidential Committee on the North East initiative (PCNI) and the implementation of Post Niger Delta Amnesty programs.
A welcome though arguably contentious NERGP initiative is the goal of reducing government ownership stakes in oil and non-oil assets. A key objective of the plan is to reduce government share in joint ventures by 5 percent and divesting other Federal Government owned assets such as refineries and pipelines. Though privatization of state assets is an economically sound goal in certain circumstances for many countries, it is important that the privatization process is perceived to be clear and transparent. It is also important to set realistic privatization goals and ensure that investors’ property rights are protected. Previous privatization rounds in Nigeria have been plagued by allegations of corruption, asset undervaluation, questionable sales, and lack of due process. Not surprisingly, the last attempt to sell the refineries was met with stiff resistance from the oil sector labor unions ironically supported by the current ruling party APC when it was in opposition. If the Federal government is serious about privatization of the refineries this time around, it must convince Nigerians of its merits with clear facts. In addition, the Federal Government must provide timelines for the passage of the Petroleum Industry Bill as a major reform tool for the oil and gas industry as a foundation for assets sales in that sector.
The NERGP failure to fully address the growing fiscal deficit and the fact that its implementation is likely to lead to an accumulation of foreign debt is cause for concern. The plan itself relies heavily on revenues from increased oil production as a key means of funding a projected rising budget deficit in 2017 – 2020. This could work if oil prices rise over the period and the security situation in the Niger Delta improves-both are big IF’s at the moment.
The acting President’s recent visits to the Niger Delta States is an encouraging start but is not a replacement for a comprehensive plan. Even if the Niger Delta crisis is resolved and increased crude oil production is achieved, there is always the possibility of another global crash in crude prices, which will erode any gains realized. Oil prices are notoriously volatile and the fundamentals driving crude oil prices have been altered significantly in recent times. The USA is currently pumping nine million barrels of crude oil into the international market and the new US President Donald Trump has not hidden his desire to see key pipeline and exploration projects such as the Dakota Access Pipeline project implemented. In a world where the dynamics and fundamentals of the crude oil market have changed and where Nigeria does not assert control on global crude oil prices, the crude oil production and revenue targets on which the NERGP is based might be challenging to achieve.
The NERGP does propose a few good initiatives to part fund the fiscal gap. For example, an increase in the value added tax (VAT) rate to 10% for consumer goods and 15% for luxury goods is envisaged from 2018. VAT remains one of the easiest types of taxes to collect and is less prone to evasion. The negative aspect of this measure is that it will disproportionally hit the poor and this is problematic given that Nigeria ranks quite low on income equality indices. The Federal Government will struggle to explain a doubling/tripling of VAT to a Nigerian populace already groaning under the current inflation and economic recession. Yet, the government has no choice but to engage the public on any VAT increases in order to avoid provoking unrest.
The NERGP measures to optimize Nigeria’s debt strategy may need a rethink. The proposed debt management initiatives could backfire and lead to an accumulation of significant debt while poorly managing existing debt obligations. For example, the NERGP proposes optimizing the country’s debt strategy by rebalancing its external debt portfolio and issuing N2 trillion bonds for contractors’ debts. However, the country’s ability to borrow on the international markets may be hampered by Nigeria’s declining ratings from international credit agencies, although the prospects look brighter following the apparently successful but relatively small $1bn Eurobond fund raising.
The NERGP proposals to fix the power problem once and for all by increasing supply to 10GW by 2019 appears to be almost as comically optimistic as President Buhari’s campaign pledge regarding the exchange rate made in the run-up to the 2015 elections. The problems bedeviling power supply in Nigeria include inefficient and financially unviable electric utilities, inadequate transmission capacity, tariffs that do not reflect generation, transmission and distribution costs, massive electricity technical and commercial losses and theft. While the NERGP does propose some good steps towards improving the quality of electric power supply, such as introducing cost-reflective electricity tariffs for electricity and restructuring utilities’ debt, it is hard to see how it will achieve a complete turn around in the power sector in just two to three years without addressing transmission capacity limitations!
The Federal Government should resist the urge to engage in spending on potentially wasteful projects such as operationalizing the Family Home Fund with N1 trillion to stimulate rapid expansion of the construction industry. While improved access to housing is a desirable goal, establishing a multimillion-dollar housing fund, in a country where the construction industry is notoriously inefficient may result in a waste of public resources. The housing and construction industry employs at least 22 different professions and industry stakeholders have been seeking government attention to implement strategies already prepared to grow Nigeria’s construction industry.
Rather than try to solve the housing problem by throwing money at it, engagement with relevant stakeholders and steadfast implementation of resolutions of such engagements may prove more productive. There is also little need to create a Development Bank of Nigeria (DBN), as there are already several development finance institutions (DFIs) in place. Instead, the existing DFIs should be restructured for greater efficiency and service delivery. The rationalized DFIs should also work better with micro-finance institutions to improve access to finance at the local level.
In conclusion, there has been a groundswell of criticism both at home and abroad of the APC led government’s slow response to the prevailing economic crisis which has led to a massive devaluation of the Naira, increase in inflation, massive job losses, growing unemployment, and until recently, non-payment of salaries in both the public and private sectors. The lack of clarity about the vision and direction of the Federal Government’s economic policy has not been good for Nigeria. The Federal Government should be applauded for at last signaling through the NERGP, its determination to take the economy out of recession and place it on a growth trajectory by committing to a clearly defined economic reform process. The plan seeks to reset expectations and it should be praised for seeking to combat corruption directly and strengthen public services – both of which are major obstacles to sustainable growth. While the plan contains many good goals, it contains a few elements that are either of uncertain quality, overly ambitious or devoid of specifics. The NERGP also relies heavily on oil revenue as a major driver and though this is risky, it is probably inevitable. Unarguably, it will lead to an increase in foreign debt and though this is not necessarily harmful because it is mainly directed towards much needed infrastructure development, it is still a major concern for Nigerians given previous chronic inefficiency in public sector management of expenditures.
David Edevbie is the Commissioner for Finance Delta State and former Principal Secretary to the late President Umaru Yar’adua.
