Nigeria: Solving the right strategic question

Investors are getting skittish about Nigeria. The absence of a clear policy on economic issues is creating a growing sense of uncertainty that is effectively freezing investor decision-making. Many players are moving into wait-and-see mode, a sharp departure from the rapt attention and optimism articulated after the general elections in March 2015.

Investors are asking: What does the Buhari administration stand for when it comes to economic strategy? In response, based on occasional comments from meetings with permanent secretaries and foreign dignitaries, the clearest answer we have to that question is Nigeria will diversify its economy by emphasizing mining and agriculture among others. Not surprisingly, the market is not convinced and has punished the stock market and the USD/Naira exchange rate accordingly; Nigeria now has an uncertainty penalty in its valuation.

It is no surprise investors are skittish. They are worried because the platitude about diversifying the economy has remained just that. Platitudes have been the official mantra for the past 20 years and while progress has been made – e.g., IT services and Nollywood – it is clearly insufficient given the backlog of millions of unemployed Nigerians. What investors are fundamentally worried about is that monetary and fiscal policy continue to remain disconnected from the aspirations of the market, and therefore the question of “what now” remains painfully unanswered.

Put differently, investors are clearly telling us that Nigeria’s governments have failed to answer the real strategic question, i.e., how will Nigeria domesticate its supply chain and serve the needs of what can be a near self-sufficient, 174m person population? The Nigerian economy today is a production platform that uses feedstock primarily imported from overseas, in factories served by overpriced power and inefficient public infrastructure, and manned by a workforce whose productivity remains constrained by archaic regulatory norms. By definition, that platform will struggle with competitiveness while imposing a tax on consumers who have to overpay for everything tradable, from education to mobile phones to pasta.

How do we fix this? The answer to this question will determine whether Nigeria continues to muddle along at a sub-par GDP growth rate. If Nigeria grew at 2 percent per annum as the market is now worried about, household incomes will double 35 years from now. Yes, that is right; Mrs. Ojo’s income will double in 2050. Clearly, that should be a non-starter for all policymakers, business leaders and civil society advocates. There are five steps the administration needs to take to ensure that Nigeria delivers the 12-15 percent growth she needs for the next 10 years to double household income within a decade.

First, the Buhari administration’s future ministers of finance, trade and investment and national planning (and their key DAs) need to issue a joint statement committing the arc of policy to one overarching strategic goal: work with investors to domesticate Nigeria’s supply chains. From the supply of maize for animal feed to the supply of specialty chemicals for manufacture of plastics, and starch for food additives, policy will focus on helping manufacturers domesticate. That will come in the form of a portfolio of incentives including R&D tax credits for innovation and the commercialization of such; tax credits for upgrading equipment; providing differentiated tariff and procurement rules for domestic producers, e.g., drug manufacturers versus importers, etc. 

As part of this process, corporations will be required to start shifting their feedstock orders to domestic suppliers based on a system of transparently issued purchase orders or the commodities exchange. In return for such steps, companies will earn a number of fiscal incentives. Government purchases will go through similar shifts, e.g., buy only from corporates that have effectively domesticated their operations, e.g., purchase of only cars assembled in Nigeria for official uses. A 24-month transition period to demonstrate substantial progress, i.e., above 65 percent, towards domestication can be put in place. Nigerian Breweries’ domestic supply chain is a good model for how this can work out for all parties.

Second, the ministers of trade and investment and finance and the heads of the ICRC, NERC, BPP and BPE should work together to announce a mechanism by which key infrastructure projects will be delivered under an accelerated public-private partnership using project finance. That would require the FGN to surrender or outsource certain key governance and cash flow rights. Using a system of competitive co-financing, Nigeria will then get the key railroads, bridges, dams, electricity plants, and airports built on time and on budget. A single federal special purpose vehicle can become the contracting counter party.

Third, the Central Bank of Nigeria should launch a dual strategy of cutting interest rates to trigger wider domestic borrowing, as well as transitioning the currency controls to a managed float over the next 12-36 months. As domestic investors start to borrow at sharply reduced rates to finance capital expenditures necessary to domesticate supply chains, the CBN can then start to move to a managed float, with a goal of a full float within three to five years of launching the managed float, i.e., by 2019-2021. It is worth noting that in the absence of a counter-intuitive rate strategy, inflation will actually continue to rise due to the import prohibitions and bans. A shock cut to the MPR is the only way to break the inflationary cycle. For this piece to work, the FGN via the CBN and DMO must now scale back its long-held habits of overpaying for capital, and therefore crowding out private borrowers. As risk premiums compress and the FGN borrows less, loan and capital markets will start to normalize. 

Fourth, the Ministry of Education, Finance, National Planning and Science and Technology work together to re-skill Nigeria’s labor force. The fact remains that graduates emerge with limited practical experience, while non-graduates have limited opportunities to gain industrial experience. Beyond that, we have millions of workers whose skills are a mismatch for current and future opportunity. A new grant programme administered with polytechnics and other institutions will enable customized training programmes for individual employers and value chains, e.g., biomedical technicians and power plant boiler maintenance crews. Companies should earn fiscal rewards for also retraining existing labour to take existing technical jobs, e.g., training chemistry graduates to become process chemists in the pharmaceutical industry.

Fifth, all ministries under the chairmanship of the minister of trade and investment should start a systematic review of the anti-competitive processes, regulations, and laws hidden in every part of the civil code and civil service regulations that act as a brake on growth, entrepreneurs and innovation. For example, it is critical that NMA, PCN and NUC rules that limit the production of health-care professionals be lifted so that more can be trained to help power an economy in which less than 5 percent of the population has health insurance coverage; worse still, the country has less than 50,000 active pharmacists for 170 million citizens. Dismantling the regulatory barriers to growth, i.e., deregulating deeply, as well as making government’s own processes electronic and efficient will be critical wins. Anyone should be able to file 90 percent of routine government applications online, e.g., birth reporting, passport requests, business registration, etc., and with a clear process tracking system, see who precisely in the bureaucracy is accountable for approval.

Finally, policymakers, corporations, politicians and other stakeholders have to hold the line on this strategy. In the past, poor sequencing has often been the ruin of good intentions, e.g., failing to provide sufficient hybrid rice seeds and irrigated land to grow the rice paddy before imposing an effective ban on milled rice imports. Going forward, using sector specific teams, over the next four years, Nigeria can put in place the right sequence of inputs and actions required to truly drive value chain domestication. Simply decreeing a ban on such items or cutting of foreign exchange access, while well intentioned, is not the right execution model.

Systematic, appropriately sequenced brick-by-brick execution is the only way; after 20 years of rhetoric, we should now know there are no shortcuts. Thus, only a concerted cross-MDA and coordinated set of actions with corporations, labour unions, and investors will underpin success. Nigeria needs such intentional policymaking and execution to ensure that results are generated and Nigeria’s economy becomes the growth engine it is eminently capable of becoming.

Jude Uzonwanne