At the recent ICAN / ICAEW Joint Economic Insight event in Lagos, it was established that to attract more foreign investments into the Nigerian economy, the policy environment needs to be strengthened by the implementation of more liberal and clearer policies. As Chief Economist for North and West Africa, Oxford Economics, Cobus de Hart specialises in the economies of Angola, Nigeria and Ghana. He spoke to BusinessDay Analyst, MICHAEL ANI in Lagos about issues affecting the Nigerian economy and gave recommendations on how progress can be made Excerpts:
You are a consultant in many African countries and emerging markets. How would you describe Nigeria compared with other countries that you consult for?
East Africa is the region in Africa that is doing very well and that is understandable, because they are not commodity dependent. So when we experienced the commodity price crash in 2015, we saw a lot of oil and major exports come under pressure – making lots of countries, including Nigeria, take on strict reforms to shield their economies against the shock. However, in my view, Nigeria didn’t follow the right routes in implementing its policies compared to the likes of Egypt, which adopted a lot more liberal policies, making the country grow at about 5.4 percent; whereas Nigeria has been projected to grow at about 2.1 percent this year.
Can you highlight some of these policies?
When the APC-led government took over reins in 2015, how long did it take President Buhari to set up his cabinet? It took him about five to six months. We also saw the budgets being delayed for at least five months every year since that time. We saw late payments to fuel marketers that led to shortages of fuel that crippled the economy. Another main thing they have also not performed on is the effectiveness of the very budget, that they promised. Capital expenditure as a share of total expenditure was set at 30 percent but last year, capital expenditure was only 14 percent of GDP as against the target set. Hence, we need to ask ourselves where our fiscal policies are going. Is it going towards growth support of the diversification drive or is it going towards somewhere else? At the same time, public debt levels have also increased and we don’t want any situation where public debt levels keep increasing while we are not seeing any gains from our fiscal expenditure because public debt will just be rising for nothing.
So, what recommendations can you give to Nigeria?
Nigeria needs to look at its policy stance. She needs to implement more liberal policies including the unification of the exchange rates, gradual removal of subsidy—yes, it will create a temporary pressure on oil prices, but it will also create more rooms for fiscal expenditures to be spent on capital projects and socio programmes for people that are poor and vulnerable. The reason why portfolio investors are still vying for Nigeria is simply because the yields in securities are very high. We saw the European Central Bank and the FED’s dovish and this has helped Nigeria in attracting portfolio inflows, but FDIs have fallen to $2.1 billion which is meagre when compared with the $3.3 billion that Ghana attracted. So I believe that if Nigeria can implement a set of more liberal and clear policies, Nigeria will do well. Even the ERGP is not clear and concise in terms of goals.
We noticed that investors are piling up into the fixed income space at the expense of the equity market. What is really driving investor’s sentiments into that space and shunning the equity market?
The equity market is slightly different from the debt market in that the equity markets are largely driven by fundamentals. Remember that you buy equities on the stock exchange because you want to earn dividends or you want the share prices to go up. The only way that happens is when the firms you want to buy into are doing well. But the Nigerian economy is still not doing all that well as there are still concerns on how the policies from President Buhari are going to affect the economy going forward; so even the 2% is not all that good to lift stocks. Another factor that we have to keep in mind is that the rebound that has been seen in the Nigerian economy is not broad based as we still see various sectors that are still not doing well in the likes of the financial sector, real estate and a few others; that is why equities are struggling to gain traction.
Portfolio flows are easy because those are foreign investors that want to put money in a country especially based on decisions from advanced Central Bank and they can invest and pull their money out quickly hence, they invest in risk-free assets especially when they perceive policy uncertainties in the country.
How would you describe the performance of Nigeria during the first quarter in 2019? Do you feel the growth aligns with reality?
I think the economy did fairly well in the first quarter of 2019. We already saw last year that the non-oil sector is gradually gaining some traction. So it is really encouraging that the non-oil sector is beginning to drive growth in the economy as opposed to oil. If you look at some of the macroeconomic indicators like the Purchasing Managers Index (PMI), they still remain well expansionary even though they came down below what we saw at the end of 2018. The downside is the disruptions in oil flows like the issues in the Nembe creek and disruption of oil pipelines as we saw oil production trending lower but hopefully, that won’t be a frequent occurrence. However, it is something that we really need to keep an eye on.
Why do you think Nigeria’s growth pace has been very slow since we exited recession, despite rallying oil prices?
The policies that Nigeria implemented shortly after the oil price shock was not the right way to go because essentially, what the CBN did was that it took the nominal shock which is oil price shock and it turned it into a real shock. So, as soon as it decided to ration foreign exchange, ban imports to boost its reserve; it suddenly turned it into a real shock so people underground could have access to forex to sustain their livelihood to buy goods. So in my view, the policy that they enacted exacerbated the impact of low oil prices on the Nigerian economy.
Oil prices which accounts for about 84% of our revenue has been well above $70. How can we benefit from this gain even with the huge subsidy payment?
We did a very thorough analysis of the subsidy payment in Nigeria and what we came up with is that subsidy payment is sustainable at any oil price in Nigeria. Oil prices can go up or down to any payment, but subsidy payment will still be sustainable. The reason for this is because Nigeria imports more oil than it uses domestically. However, higher oil prices comes with a higher landing cost for the country, but Nigeria is still making way more money from the sales of oil.
However, what this does in most countries is that it crowds out spending on grass root initiatives like infrastructural development and electricity that could have benefitted the masses more. Studies have shown that fuel subsidies actually benefit the rich more than the poor.
What reforms can Nigeria carry out to bring down the rate of unemployment?
You need to generate more funds to grow and focus on sectors that are labour-intensive. In my view, Nigeria cannot do that on its own because the size of its spend to GDP is too small, she needs to attract more FDIs by creating an enabling environment so that investors can come in and invest. Nigeria should also consider privatizing some of its assets in certain sectors as this will help in driving growth and alleviating its unemployment issues. There is also a need to focus growth on high employment sectors such as Agro-processing, manufacturing etc.
What advice can you give on Nigeria’s increasing debt at N24 trillion. Do you think it is a problem for us?
Whenever I look at Nigeria, I see some portfolio managers making this mistake of looking at debt as a percentage of GDP which is really very low in Nigeria’s case. But if you look at the size of the country’s fiscal deficit which is just below five percent; if you look at interest payments as share of revenue which means how much of your revenue is going directly into servicing debt; they are all going out of proportion. This already means that a significant portion of its revenue is already going into payment of debts which is something that really needs to be looked into. Nigeria cannot simply continue to borrow money. What is even more shocking is that fiscal expenditure is ineffective, so why are they borrowing money? To do what? To spend on roads, infrastructure, capital expenditure, salaries, subsidies and also delay payments on state employees? Now we have the new minimum wage which is going to increase recurrent expenditure more which will hinder the room for diversification efforts.
One of the problems Nigeria is having is shortfalls in revenue. How can we shore up our revenue buffers?
The route Nigeria is following is not something I will advise. What Nigeria is doing is putting fines on private companies like what we saw with MTN and the banks. They are also clamping down on some perceived corrupt officials through the EFCC. Now also, they are claiming back taxes from oil majors making them divest from the Nigerian economy. Again to me, the business environment has really been unfriendly. For Nigeria to raise more revenue, the economy will have to go through some pains. By raising VAT and cutting down on government expenses, Nigeria could rake in more revenue.
Your projection for Nigeria in 2019 is 2.5% growth, higher than IMF revised 2.1% growth. What are your thoughts on this?
We see the non-oil sector expanding by 2.7 percent at the end of Q4 as it has already started gaining some traction. We also see the new minimum wage coming in alongside the Central Bank loosening policy. We see inflation going lower on the average however, there are also some upside risks. All of these macroeconomic indicators are going to support the rebound in non-oil activities which in turn will boost consumer’s spending. The other thing we need to keep mindful of is FX ratio which has declined significantly. Foreign reversal has gone up due to portfolio inflows. We are expecting one more rate cut this year which will further boost foreign inflows. Remember also that we are expecting Dangote Refinery to come in soon. All of these are very positive for the Nigerian economy hence we are very comfortable with our forecast of 2.5 percent growth.
How do you see the future economic prospect for Nigeria seeing that growth rate is growing below that of population growth?
It is concerning. At the end of the day, for a country to take advantage of its demographic development, it will need to create more jobs and there are jobs. Nigeria is trying to do this but usually, the way it has been done is through FDI (Foreign Direct Investment). Foreign companies come in to set up more factories and that was what happened in China. They have a cheap labour force and everybody shifted their manufacturing focus to China and income level began to rise and people could afford more and that is how they keep moving from industrial- based economy to service-based economy. That is what other African countries are doing but Nigeria is rather following a closed diversification strategy. If they can’t get it right, which I see a very high probability of, then Nigeria might be in significant risk of losing out on the democratic government.
What is your assessment on the Medium Term Expenditure Framework?
I went through it; it is more of the same. There are not a lot of changes in these documents. What strikes me from this document is that its highlights a lot of public infrastructure investments like railways but the money is never directed towards that and so, there is a lot of stake and a lot of tools but does it really happen? And if your Medium Term Expenditure Framework of budget deviates significantly from reality, then what value will the MTEF really have?
What do you think Nigeria can leverage on to drive her financial inclusion target of 80 percent? We are already expecting the PSB. Do you think that is enough?
I am not 100% sure whether the PSB is going to be a hit because I heard there is a lot of lobbying by the banks as they don’t want Telcos to start coming in to the space. It is really interesting and I think Governor Emefiele is bent on seeing it work. Yes, it is still very uncertain but I think it is a step in the right direction. However, we might have to take it slowly because the Nigerian Market is different from other countries such as Kenya, Ghana and the likes. My suggestion will be that there should be a lot more research and case studies from other countries before proceeding.
You are at the fore front of foreign investors. What is their perception as regards Nigeria and what is their major challenge hindering them from investing in Nigeria?
Honestly, not really good. The reason for this is the policy. I am talking about Private Equity investors, Foreign Direct Investors, people willing to build factories and put up structures in Nigeria. And the reason for this is that they know Nigeria has this close diversification strategy and policy is very uncertain here. You go through four years here without the CBN taking the rates up and down from 11 to 12 to 14 alongside the restriction in foreign exchange and there is the ban in certain commodities. Even the PIGB has been delayed and you have seen a lot of oil marketers divesting from the Nigerian economy. We should have sorted all these out and gotten a clear and precise oil bill on the table.
Talking about the African Free Trade Agreement, do you think our market is mature enough to sign it because the Nigerian government had said that we are not competitive enough?
Where Nigeria is right now, it is following this inward driven diversification strategy. So it does not want to open its borders. I understand why Nigeria is going that way. It is because there could be a lot of dampening, but it is also going to be a gradual process because if Nigeria signs it now, I think it is going to take five to 10 years before it gets implemented. There are so many modalities that need to be put in place before the African free trade will come into place. There is movement of goods, movement of people, customs that need to go into that. But for now, I think Nigeria will hold on before signing it. The only problem is that if you start to ban goods like rice for instance, it will take some time for farmers to start producing more rice. What happens in the meantime is that the price will go up. Let’s say now that the local farmers start doing well, how are we going to know if these farmers are competitive? Let’s say later on down the line, imports take over; we see that local farmers will be charging too much for rice. They are not competitive because they have not been exposed to global competitiveness. So, the practices they use may get affected. They are not seeing global new technologies for implementing new techniques. I am talking about rice here but there are a lot of other industries and they might become uncompetitive. That will have a bad effect on the economy because they might charge higher prices than we can afford.
What does your job as Chief Economist of West and Central Africa entail?
I cover most of these countries, macroeconomics. What we do is that we monitor these countries on a continuous basis on the micro and macro level, employments of labour markets, monetary sides, external balances, currencies, global development etc. We monitor these countries on a daily basis. In my case, I have a team working with me and we cover some of the other countries. We publish reports on some of the African and sub-African clients. They get some of these reports on a monthly basis and we use Statistical Methodology and information to drive our foot prints.
Is this your first time in Nigeria?
Yes, this is my first time coming to Nigeria. I came in last week. I am not sure whether they are building the airport but it seems to me that going by international standard, the airport needs some work. I remember vividly when I was coming through international arrivals, it kind of gives the impression that there are still a lot that needs to be done to improve infrastructure and I think that is part of the broader picture.
When you are driving through the mainland to the Victoria Island, you could see the lights off on the mainland which shows that there are still a lot of income inequalities in the country. It boils down to the locals which seem to back some of my assertions that policy implementation has been very poor over the past four to five years and there seems to be a lot of distress in the government as well; at least from some of the people I have spoken to.