With less than 8percent revenue-to-GDP ratio and 115th position in global ranking, Nigeria has the lowest revenues in the world, according to the World Bank, which sees the situation as requiring deliberate, urgent attention. In an exclusive interview, SHUBHAM CHAUDHURI, World Bank’s Country Director for Nigeria, and MARCO HERNANDEZ, World Bank’s Lead Economist for Nigeria warn against complacency, while urging needed reforms to help the country navigate through present economic challenges. The two economists spoke to ONYINYE NWACHUKWU, BusinessDay’s Abuja Bureau Chief. Excerpts:
What are the major highlights of the recent World Bank Nigeria Development Update?
Shubham: While Nigeria recovered more quickly from the recession and while the recession was not as severe as we had feared, and that’s all good news, the fact of the matter is that the urgency and criticality of continuing with the kinds of reforms that the government undertook in 2020 remains; and in some ways, because of what has happened with rising inflation and rising insecurity over the last 6 months, there has to be a continuity of those reforms, not business as usual, and that remains urgent. That’s the basic message. There is obviously good news in terms of that, the recession was not worse or more severe or prolonged and that was due to some of the bold reforms and overall fiscal management by the government, but, now is not the time to say we are out of the woods. The impact on poverty is very clear, in terms of rising prices with flat nominal incomes, people’s ability to meet their basic needs has diminished, especially the vulnerable and low income earning Nigerians. So, that’s our overall message, to really continue with the kinds of reforms on the fiscal front, in terms of service delivery, improving the quality of expenditure, but with a special focus on dealing with high inflation and the impact that it has had on the livelihood and welfare of the people.
For Nigeria, this is not the time for complacency in terms of economic recovery, where exactly should the government be paying attention?
Marco: First of all, we have an immediate priority at the moment, which is to reduce inflation and to do so in a way that protects the poor because many families in Nigeria are being affected by high inflation; and also to make sure policies are implemented to further recovery, because we are still exiting the recession, so that growth can, not only be faster, but can also be sustained. So, there are six areas that will be needed in the immediate term and then there are other challenges that would need to be addressed also after we are able to reduce inflation in a way that supports recovery. So the six areas that we highlight in the Nigerian Development Update are; exchange rate management, trade, fiscal policy, monetary policy, and there are two that are more about the protection of the poor and protection of vulnerable groups, and they include social protection and support to specific micro and small firms. So, it is the combination of that and a package of reforms and programmes in these six areas that would help to achieve that needed objective, because, as already stated, inflation is having a very significant negative impact on the economy and on the poor. We estimate that in 2020 alone, about 7 million Nigerians were falling into poverty as a result of what we call the price shock. The increase in the rate of prices during the year is a very significant number and that’s outside of other effects around the COVID-19 crises, it is mainly about the price shock.
On trade, the bottom line we have seen is that inflation has started to rise very significantly following the border closure that happened in August of 2019. There is a direct link between the border closure and increasing food prices specifically. And it is interesting because the first few months following the border closure, those states that were very close to Benin were the most affected by the price shock. Then the price shock spread to other parts of the country, but that’s an interesting thing to highlight. What we believe is important here is to fully reopen the land borders to trade; and to make sure we facilitate the import of staple foods and also medicines because these are critical not just for inflation, but also to support efforts to combat the pandemic. In that way, a review of existing foreign exchange restrictions and the importance would be very critical to see whether they continue to need to be applied in the current context of the pandemic, where we are seeing the price of food and medicine rising. That’s in the area of trade.
In the area of fiscal policy, one thing that we believe is critical is to establish mechanisms that can enhance the monitoring of the stock of CBN overdrafts. This is important because financing of fiscal deficits through the CBN overdraft is more expensive than domestic aid or debt from international financial institutions. Also, an extensive use of overdrafts also affects debt management and debt transparency. Very importantly, it reduces the effectiveness of monetary policy, because CBN cannot use those resources to follow all their monetary policy objectives. So, that’s why we believe that establishing mechanisms that can monitor the stock and flow of the CBN overdraft and also how they are serviced will be critical on the fiscal side. On the Monetary side, one key point is the announced and well communicated commitments to price stability as a primary monetary policy objective. The CBN right now has several objectives that they are trying to push. For example they are trying to promote growth, ensure exchange rate stability, they are also trying to contain inflation, but the challenge here is that when you have these multiple objectives, it is difficult to act. We believe that a commitment to price stability is essential and in that particular regard, if the resumption of the use of open market operations is going to be one way to make sure that happens.
On social protection and support to MSMEs, we believe that there is an opportunity to provide targeted and also time-bound cash transfer support to poor households, and this is using the existing mechanisms that have been enhanced during the time of COVID-19. For example, both the national social safety net programmes and the rapid response registry that has been completed could be expanded to provide these targeted support. And on Micro and small firms, to make sure that there is targeted support so that they can access equity financing at a time when it is very difficult to credit.
These of course could be well monitored in a way that they could be reviewed for their effectiveness and understanding that fiscal resources are limited. So these are the six areas that we consider to be the immediate priority. One more point I want to make is that, beyond these immediate needs, because inflation is very high and needs to come down; there are two policy areas that we have in the Nigeria Development Update, and without seeing action on these two fronts, it would be very difficult to ensure a robust recovery. These are power and revenues. These are core policy objectives that the government itself has set as critical for Nigeria and sustained action is needed even though we have to come back in the near term, these are two areas where sustained action has to happen. We just need to make sure that we do as much as possible, both in good times and also in bad times to make sure that we amass the objectives of power and revenue mobilization.
Do you think that current efforts to rein in inflation, curb high poverty levels are sufficient?
Shubham: The overarching message is to put in pace measures that will help bring inflation down over the near to medium term. One of the priorities will be to cushion the poor from the impact of rising prices like scaling up targeted cash transfer programmes. Also, immediate measures to free up the borders, allow freer trade and improve access to foreign exchange would also help in the near term, but, for the longer term, there are structural issues that have to do with monetary policy, etc which would also help. But the key point I would like to make is that there is not going to be a quick fix overnight, but, in the meantime, the poor are suffering, so, part of what we are saying to government is that, this is the time, think about how ordinary poor Nigerians can be helped, cushioned from such high inflation.
The natural question now is, with the government fiscal resources being so limited, can Nigeria afford this kind of programme to scale up for example cash transfers? Our response would be yes, this is something that would require fiscal resources which can come from redirecting expenditures or actually ensuring that greater revenues come into the federation account and that one of these sources is to move on PMS subsidies. This is one number that you may already know, but, given where oil prices are right now and therefore what the cost of importing gasoline is, and given what the current domestic PMS price is, the government is essentially spending, not as directly as you see in the budget, but from the fact that NNPC is withholding revenues that they would have otherwise transferred to the federation account.
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The government is spending about N150 billion a month, and you get that roughly by looking at the gap between the import cost and domestic price, which is about N100. It’s actually a little above N100 per litre and Nigeria, according to the NNPC consumes around 50 million litres a day. So, if you multiply 50million by N100 and then multiply by 30, that’s how we got N150 billion per month. Of course if oil prices keep going up, that’s good news for Nigeria on one side , but the positive impact of increasing oil prices will be really diluted because those increased revenues will not flow into the federation account if PMS continues to be subsidised.
On import restrictions and border closure policy, there is a key concern around dumping and disincentive to local production. Are these not sufficient reasons to sustain these policies?
Marco: What I want to highlight is that, the stated objective around the border closure was to combat insecurity and smuggling, at a time when that was quite prominent in the discussions at the international level and in Nigeria as well. So, what we see is that the border closure has had a series of unintended effects; in terms of increasing the price of food for example, limiting the availability of raw materials to be transferred into Nigeria and to industries that required imports and also created uncertainty around investors that were planning on bringing their financing at a time, this would have affected their investment decisions. So, with all of these and the intended objectives, the key question is, to what extent does the border closure help to address the objectives that it set forth to do. Secondly, any broader or longer term objectives that it may have around supporting local industries which is often a point of conversation?
That is the same stated objectives that come with foreign exchange restrictions for example, that will help to promote local industry. So, what we see in other countries and also in Nigeria, is that there are better ways to ensure that we support the local industry. For example, tomatoes are produced in the North and they have to be transferred to the South where consumption is more prevalent, but you have a situation where you have an internal trade, we are not talking about foreign exchange restrictions here or border closure. But if we are trying to get tomatoes from the North to the South, if we do not have the required infrastructure in terms of roads, we may have a situation where the trucks do not reach the market and then a significant share of tomatoes are lost on the way.
We may also see a situation where trucks have to spend many hours crossing the different states, because there are checks and other reasons why they might stop, sometimes it is also insecurity. What happens is that it increases the price of tomatoes that are transferred. If on top of that, you’ve had a situation, where you are in a place that is next to another country where they are importing tomatoes, then you close the border, the likely outcome is that the prices of tomatoes in the South will increase and it is not necessarily going to give more incentives for the North to produce because they are facing all these other challenges that will not necessarily be addressed in the immediate term.
So, this is the situation that we are facing and why all these need to be taken into account and that’s one of the reasons we recommend that there are number of ways which industries could be supported for improved competitiveness and to ensure that more is produced and at the same time, there may be unintended effects from policies related to trade restrictions for example, that could be affecting Nigerians at a time when they are facing a crisis.
Nigeria is at a critical point where low revenue generation is taking a toll on developmental goals amid tepid growth. How best do we ramp up revenue without causing more harm?
Marco: First of all, Nigeria is in a ranking of 115 countries for which we have data on general revenues such as oil and non-oil. In the last five years, Nigeria, on the average, has been collecting about 8percent of GDP in revenue and the world average is around 30percent. So, when you rank these 150 countries, Nigeria ranks 115th, so it has the lowest revenues in the world on this particular ranking. That highlights the urgency. So, we are starting with the need for urgency to mobilize revenues and in that context, we are fully aware that raising revenues at the time of crisis needs to be thought through very carefully, because we do not want to suggest any policies or programmes that would be affecting investment or job creation.
We see four pathways going forward: One is to make sure that more oil and gas revenues flow into the federation account, and that largely has to do with transparency and accountability in the oil and gas sector. A second pathway is like we already highlighted the importance of PMS subsidies which are also large, around N150 billion per month, if we would eliminate PMS subsidies, which are resources that would then be flowing into the federation account. In the same way there are other types of home-grown revenues that could be addressed that would not be affecting the pace of recovery or investment or growth. A third pathway is what can be done on the tax and tariff. We were discussing recently about, for example what can be done to improve compliance or what can be done in terms of excises or reducing tax incentives to make sure we collect more at a time when we know it is very difficult to raise tax rates, we can do more to collect the VAT rates that is due without increasing taxes for example. On excises, they are important to consider because they are focused on specific items and on the final cost of the item. If for example we increase excises on cigarettes or alcohol or sugary drinks, we will not only get more revenues, we would also get positive health implications, and in addition we do not necessarily affect inflation and other things, because these are items that do not contribute a lot to general inflation. What contributes to inflation are things like yam, potatoes, rice etc. The fourth and final one is divesting in public assets, that provides a one-time revenue flow, but it is also an important thing to consider at a time when much is needed to raise revenues and to also improve the efficiency of some sectors of the economy that could benefit from divestment of public assets. So these are the four pathways that we highlight. In the Nigeria Development Update, we went into detail on the third pathway which is on what we call non-oil revenue mobilization which focuses on taxes.
How challenging are Nigeria’s current tax expenditures?
Marco: Tax expenditures are also tax incentives, this could be brought about in ways in which, maybe a policy serves a particular investment, it’s not subject to tax, with the hope that it will help to promote growth and support. Here our main recommendation is an extensive review of the existing tax incentives. This is because the ministry of finance has found through their latest publication in the budget, a tax expenditure statement, which is a new thing and a very important reform from the ministry of finance.
As part of the budget, they calculate how much the country is spending on these tax incentives or tax expenditures. We are talking about at least 2.5percent of the GDP in tax expenditure, which is a significant amount of money. So, the recommendation is to review extensively these tax expenditures and to see which ones need to be rationalised, and which ones have been effective as to continue. The total tax expenditures for 2019 from non-oil revenue sources totalled 3.2percent of GDP and the collection for these particular taxes on non-oil revenue sources in 2019 was 2.5percent of GDP, so, this gives you the magnitude. Tax expenditure is basically the revenue that you would have otherwise collected if you had taxed, so it’s a significant amount, it’s more than what you can collect right now.
Does it mean that we are not getting commensurate gain from tax expenditure policy?
Marco: It simply means that if these tax expenditures did not exist, we would have been collecting this 3.2percent of GDP.
How about the impact of those incentives in encouraging local production, investments and all that?
Marco: This is why we believe that the first step is to quantify and that has been done by the ministry of finance and we congratulate them for that. The second step is to increase the transparency of this. They have already done it because they are publishing these reports and they are providing details on the situation. The third step is to do a review on whether these are fully effective or not, and to what extent they can be rationalised. The fourth step is to rationalise the ineffective ones. What we find internationally is that there is a lot of scope to do so, and because it is a politically sensitive issue, the first two steps are critical and they have already been made; to quantify and to be made transparent. The next step is Nigeria’s choice, the government and citizens to have a consensus around the need to move on this aspect.
The CBN has been making efforts to unify different FX rates, but there is still a wide gap between the official and the parallel market rates, which of course encourages arbitrage. How huge is this problem?
Shubham: We think this is actually a very serious problem in terms of how it is affecting the economy, you know I talked about the fact that restrictions on accessing foreign exchange is contributing to inflation, because there are quantitative restrictions that you cannot use foreign exchange to import certain types of goods, that is contributing to inflation. But, more importantly, this is really getting in the way of domestic firms from continuing to operate, increase jobs and add value. I am sure you have talked to many Nigerian firms, they could be joint ventures with international companies or they could be completely home-grown and indigenous, but every private firm that I talk to, will talk about how they can’t access critical intermediate imports that they need.
I guess even though much of the value added is in Nigeria, no economy can completely provide every single thing that the firms need to operate and produce. So, there is always reliance on importing certain key things; it could be raw materials, it could be intermediate imports, it could be capital equipment, when you are setting up a production line, but the fact of the matter is that domestic firms have been struggling with access to foreign exchange. Then the question is, how can Nigeria ease access and make foreign exchange more available for domestic firms? And I am focusing on domestic firms but there are also people who may want to get foreign exchange for other uses and speculation etc. So, I am really saying that the CBN has to be careful about ensuring that foreign exchange goes towards the uses that most directly benefits the Nigerian economy and the Nigerian people, but the fact is that right now, everyone is struggling including these domestic firms who I would have thought would want the regulations to be eased so they can do business and create jobs.
Now, how does exchange rate management and policy come in? This is where I would bring in the ‘pressure cooker’ analogy. We think of the parallel market rate as basically a signal of how much pressure is building up in terms of the FX market. And we recognise what CBN has done to harmonise the other exchange rates, in particular the official exchange rate and the NAFEX rate, but, this parallel market rate is still signalling that there is build-up of pressure, excess demand essentially for foreign exchange.
When pressure builds up in a pressure cooker what do you do? That’s why they have these valves where you can let off all the pressure. So essentially that’s the point that, if the access and the trade in foreign exchange through the NAFEX window can be made clearer and more predictable; having a clear auction mechanism, allow banks and others to come in, and inter-bank market, have the auction mechanism that works within certain bounds. CBN and Nigeria have a managed float exchange rate system, and as part of the managed float, you don’t want to have disruptive movements in the exchange rate. So, having that clarity and predictability will in our judgment, reduce some of the pressure that is reflected in the parallel market rates, by reducing the uncertainty, the speculation about how much the naira is going to depreciate or whatever. Look at what happened in 2016 and 2017, when there was a huge divergence between the official exchange rate and the parallel market rate. Over time, as CBN adjusted the official exchange rate and ultimately, I believe in March of 2017, introduced the I&E window and the NAFEX rate, it was like the pressure built up all of a sudden deflated and the parallel market rate came down. That is essentially what we are saying, that look, having a clearer, more predictable exchange rate management and an auction mechanism where many suppliers and people can participate would actually help bring the pressure down.
Let me make one last point in this regard, one often hears that having the NAFEX rates adjust a bit more to market signals would increase inflation, we have talked about rising inflation as a concern, so we certainly don’t want to exacerbate the inflation pressures. But our judgment again, and this is very Nigeria-specific, is that the inflation rates actually track the parallel market rates and you can talk to many firms, they are also doing business already which have reflected in the cost of accessing foreign exchange through the parallel market. Another way of putting it is that all our suggestions about the exchange rate for the CBN and the government to consider, are those that we believe will bring down the parallel market rate, and in doing so, will actually help reduce inflationary pressures. That seems kind of intuitive, because everyone says if you let the NAFEX rate respond to market pressures, that leads to a larger depreciation of the NAFEX rate and that would contribute to inflationary pressures. We believe that because the inflationary pressures are actually already captured and reflect and track more of the parallel market rate, anything that can be done to bring down the parallel market rate by letting off some of the pressure – like releasing the valve in the pressure cooker – would bring down the parallel market rate and then reduce inflationary pressures.
How is the World Bank helping in Nigeria’s economic diversification quest?
Shubham: You should know this about the World Bank, our purpose and mission here is to help the Nigerian government, both at the federal and sub national levels, eliminate poverty and basically accelerate inclusive growth driven by private investment and job creation. To do this, first and foremost, we provide concessional financing for the government. We are a source of concessional finance for the government’s budget. We provide the concessional financing for investments, for things that are directly linked to this basic measure, which are things that will help eliminate poverty and boost inclusive growth.
But, concessional finance itself is only one part of the picture. Actually, much of what the government needs to do to eliminate poverty and especially free up the space for private investment, comes from the policy and institutional front, the kind of policies, that’s where our advisory role comes in. I always make clear that we are here hopefully as trusted partners, we are using the data, our understanding of how the Nigerian economy works as well as experience from other countries to make suggestions for government principals to consider. In terms of the amount of concessional financing we provide, as at January or March 2021, we had outstanding commitments, concessional finance agreements that we have signed with the government and that are being implemented by ministries and agencies, either at the federal or state level.
Our portfolio was about $12 billion, that’s the overall commitment that the World Bank has made in terms of signed finance agreement. And from that, as these investment programmes get implemented, you have disbursements. So, what we do is to disburse dollars based on these well-defined programmes. We disburse into designated dollar/domiciliary accounts basically, which then have the benefits of contributing to the Central Bank’s reserves, but then get the naira provided to the relevant MDA for the implementation of these programmes.
So, on your question on what we are doing overall to help this economic diversification challenge? Number one, I guess one of the biggest areas that we are trying to help the government is on the power sector recovery project. We have up to a $465 or $470 million programme to help get the transmission networks in place. We have a $350 million programme to help with rural electricity access, primarily through solar and mini grids and also in a way that crowds in private investment. We have a $750 million programme to basically help direct support of the power sector recovery programme of the federal government. We have another $500 million programme specifically to help distribution companies make the necessary investments in metering etc, put in place the systems, internal management information systems so that they can improve their service, and also track payments.
If you round that up, you are talking about $2 billion altogether directly towards power sector recovery which we think is critical for domestic economic diversification and jobs creation. If you think about the other things that would help the economic diversification agenda and the jobs agenda here, helping to strengthen agribusiness value chains. We have financing through the ministry of agriculture and rural development to put that in place.
On the digital front, we were at a recent meeting with Minister Pantami, which was one among many meetings. We are working very closely with the National broadband committee to think about how the 6th broadband infrastructure, the backbone basically, can be expanded at an accelerated pace, because having that digital backbone really helps spur all kinds of other economic activities. So, we have a wide range of programmes where we are providing finance, but, one main thing I will say to you is that yes, financing is needed, but policy and institutional reforms are needed more than anything else right now. That will really help unlock private investment and further the economic diversification agenda. This is because at the end of the day our financing is even at most, maybe, two and half – three billion dollars a year.
Nigeria’s financing needs are much more especially for infrastructure, and would have to come from private funds and that’s why policy and regulatory environment is critical, that will provide the confidence to private firms that they can start investing and not just trading. The difference between manufacturers and traders is that manufacturers are making fixed capital investments that they can’t easily unravel and, in order for firms and manufacturers to make those kinds of investments, they have to have some clarity and certainty about the policy and regulatory environment.
How would you then access Nigeria’s power reform programme which the World Bank has been deeply involved in since 2017?
Shubham: Short answer, yes. The power reform programme was formulated in 2017, but I think the necessary consensus, within both and the broader group of stakeholders in the electricity supply industry and the public at large was not there. We had a section with many media partners to talk about what that Power Sector Reform Programme (PSRP) envisioned and the short answer is that it took time to take off. We believe that in 2020, the implementation of the PSRP did take off on a variety of fronts, through the tariff adjustments, towards more cost reflective levels with NERC, the Bureau for Public Enterprise coming in to have clear performance improvement plans from the Discos.
So, the real implementation of PSRP began in 2020, and significant steps have been taken, but this is one of the areas where we keep talking about the urgency of continuing with those reforms and maybe even accelerate them. I think you will start to see some immediate improvements in service standards, but, in terms of the overall power shortage in Nigeria, that is going to take a bit more time to be fully addressed. In the meantime I will encourage you to take a look at some of what the rural electrification agency is doing, because it is sort of an all hands on deck approach. Yes, we have to fix the problem within the national grid and the eventual expansion of the national grid and connecting all power sources, because Nigeria right now is not a single national grid, it’s multiple.
While that is ongoing, what the rural electrification agency is trying to do is to go out to the most remote communities, places where the national grid is going to take quite a while to get to, and through these solar mini grids often financed through private investment, but maybe with a capital subsidy upfront, to try and work from that side coming in. So, that’s the plan. The bottom line is that, yes, it did not get started when it probably should have, but now in 2020, we do see real momentum and we hope that it continues.