Nigerian economy: Why reform is imperative

The Nigerian economy is in a bad shape, although government officials believe that all is well. The panic measures taken in the last quarter of 2014 in response to the oil market collapse-induced fiscal crisis cannot address the deep-rooted crisis.  The various tiers of government have built up expenditure levels that are now very much above the revenues available.

The Federal Government, for example, has an expenditure profile in which recurrent expenditure, mostly personnel commitments, account for the lion’s share of total spending. In the 2015 Appropriation Bill, recurrent expenditure including debt service payments accounted for about 90 percent of the total budget. The implication of the fiscal crisis is the incurring of fiscal deficits, accumulation of debts and payments arrears.

This has become the case as the outgoing government has squandered the fiscal buffers accumulated in the form of Excess Crude Account. Last week, the newspapers reported the depletion of the nation’s foreign exchange reserves to the level of a little above US$ 29.0 billion, having declined from US$ 42.847 billion in December, 2013. At the average monthly rate of importation of goods and services of US$ 4.279 billion in 2013, the current level of imports can sustain only about seven months imports or less, down from 16.6 months in 2009. At the lower-tier government level, salary arrears to public servants have already begun to cause industrial disharmony.

After May 29, the in-coming government should be able to have all the facts of the unflattering economic situation. This government has ridden to power on the platform of fighting corruption. But it will take some time before the savings from a successful anti-corruption campaign will be substantial.

Even then, the savings from an anti-corruption strategy will definitely not be enough. Therefore, there is the urgent need for reform on both the demand and supply sides of the economy. The present circumstances provide the best opportunity for the in-coming government to implement needed adjustment measures. What the President-elect should do after inauguration is to publish the facts of the Nigerian economy for Nigerians to see.

He will then plead with them to show understanding and allow his government to implement the inevitable structural measures which, by their nature, may be painful in the short-term. But over the medium and long-term as the economy responds to the measures to stimulate growth and development, the hardships will lesson significantly.

Reform becomes inevitable in the current situation of Nigeria whereby the economy experiences fundamental or structural imbalances with adverse internal and external shocks contributing to such imbalances and macroeconomic instability. It reflects the situation whereby aggregate demand exceeds supply or put simply, the nation is consuming beyond its means. Correcting such a situation requires both cutting expenditures to match resources or aggressive mobilization of resources to match expenditure, besides structural transformation of the economy. Nigeria implemented an IMF and World Bank supported adjustment programme from 1986 to 1993. But that programme was defective as it was devoid of complementary social welfare programmes. So much havoc had been done for about two years before the need to implement social welfare programmes was realized. What is being advocated here is reform with a human face that will not sacrifice social programmes. Already, the in-coming government has a plan to introduce a social welfare scheme by which unemployed people will receive financial assistance as is the case in most countries that care.

The reform being envisaged is crucial in view of the changed circumstances brought about by shocks and bad governance. It does not have to be a full-blown reform programme but should contain key elements that will enable the government to mobilize more revenue, eliminate inefficient and wasteful spending, and effectively perform rather than being a lame government from the beginning. A few elements of the desired adjustment are as follows:

•Raise more revenue by increasing the value added tax from the current 5 percent to 7.5 – 10.0 percent;

•Deregulation of petroleum product prices to free the nation from the payment of fictitious subsidies and associated corruption, and save money for social welfare programmes. The best time to deregulate is now with the low crude oil prices in the world market. The adverse impact of deregulation on the macroeconomy will be much less.

•Drastic cut in the emoluments of political office holders and legislators. This will generate some savings and discourage frequent agitations for wage increases. The personnel budget has become unsustainable;

•Rationalization of the numerous government parastatals that are currently performing duplicated functions. The out-going government has not had the courage to implement committee recommendations on rationalization.

Against the backdrop of a strong commitment to good governance, the above reform measures would be tolerable and Nigerians should support them for a better tomorrow.

MIKE IDI OBADAN