Tony Edeh, Group Managing Director, Norrenberger, an integrated financial services group, has years of experience in investment and portfolio management, strategy and financial risk management. In this interview with BusinessDay’s David Ijaseun, he shares insights on strategies Nigeria’s new government can adopt to rescue the economy.
The Nigerian economy lost its bite with the high cost of funds at 18.5 percent, almost crowding out the private sector, how do we resuscitate real sector funding for wealth creation?
The real sector is a prime driver of economic progress. My belief is that beyond direct funding, the real sector must be supported with the right policies. The new government should take steps to reassess the existing framework within which the real sector operates. If this is achieved, the economy will flourish. If the framework is frail or incomplete, then the real sector will struggle.
For our industries to thrive, there is a growing need for inputs to serve the growing population, many of which are agriculture based. The last administration invested heavily in agriculture, providing loans, and expanding the country’s total area of cultivated land for crops, livestock, and fisheries. The new administration must take steps to promote vibrant commodity exchanges that will guarantee minimal pricing for produce.
Building on this foundation, the leadership must accelerate faithful implementation of the ‘infrastructure master plan’ by adopting proven financing structures till it delivers an acceptable stock of hard infrastructure through seaports and airports; road, rail and water transportation linkages that can support private sector growth.
Nigeria’s debt grew about 500 percent under Buhari, with debt to GDP ratio at 32 percent. how best can the new administration manage its impact on the economy?
Personally, I do not embrace the conventional wisdom that fiscal deficits by the national government are inherently bad. All governments, especially in this era of fiat currency, run secular budget deficits. This is an inherent part of modern governance. The most powerful and wealthiest governments run deficits, as do the poorest nations.
A budget deficit is not necessarily bad. Look at the Japanese example with high government borrowing and low inflation. The United States, United Kingdom, Japan, China, and India have significant amounts of national debt, with the US having the largest at over $31.46 trillion. Nigeria is facing economic challenges due to its high levels of government debt, which has led to a stunted GDP growth rate, slowing export growth rate, reduced income per capita, and increasing poverty levels. The real issue is whether deficit spending is productive or not. Unproductive deficit spending is a compound negative, especially if backed by excessive borrowing of foreign currency. This is not classroom economics, but it is the lesson of the real economic history of nations.
To salvage the budget deficit and attendant borrowing implication, fiscal policy will be the main driver. Monetary policy is weaker and a less effective instrument, bad monetary policy is, of course, destructive. Even good monetary policy cannot carry the load the fiscal arm can. Thus, the government must steadily remove itself from the fiction of tying the budgets to dollar-denominated oil revenues and expand the economic revenue base rather than engage in perpetual borrowings.
Given the importance of managing government debt in Nigeria, it is crucial that the current administration adopts proactive debt management strategies. Some of the measures that can be taken to manage the country’s debt levels include:
However, simply raising taxes is not enough, as many question the value of paying taxes, hence the high level of tax avoidance.
Adopting fiscal discipline means fiscal policies that aim to balance government spending and revenues. This can be achieved through measures such as increasing tax revenues by expanding the tax base, reducing wasteful spending, and improving the efficiency of government programmes.
Implementing prudent monetary policy measures that aim to control inflation and manage interest rates. This can be achieved through measures such as controlling the money supply and maintaining a stable exchange rate.
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Developing a debt management plan that aims to reduce the debt-to-GDP ratio over time. This can be achieved through measures such as reducing government spending, increasing tax revenues, and attracting foreign investment.
Ensuring that debt is used to finance productive investments that have the potential to generate returns and improve the standard of living for Nigerians.
Increasing transparency and accountability in government debt management and ensuring that the public is informed about the country’s debt levels and management strategies.
The Nigerian government has ushered in a new administration, what are the key suggestions you are giving to the incoming administration?
The starting point is macroeconomic and fiscal stability. Unless the economy is revived and fiscal challenges addressed boldly, resources to develop will not be there. Nigeria currently faces huge fiscal deficits, and this has been due to huge federal and state government expenditures, lower receipts due to dwindling revenues from the export of crude oil, vandalism of pipelines and illegal bunkering of crude oil.
According to Nigeria’s Debt Management Office, Nigeria now spends 96 percent of its revenue servicing debt, with the debt-to-revenue ratio rising from 83.2 percent in 2021 to 96.3 percent by 2022. The world bank predicts that this number will worsen over time if not checked. Some will argue that the debt to GDP ratio at 35.3 percent is still low compared to other countries in Africa, which is correct; but no one pays their debt using GDP. Debt is paid using revenue, and Nigeria’s revenues have been declining. Nigeria earns revenue now to service debt—not to grow.
Support should be given to private sector refineries and modular refineries to allow for efficiency and competitiveness to drive down fuel pump prices. The newly commissioned Dangote Refinery by former President Buhari—the largest single-train petroleum refinery in the world, as well as its Petrochemical Complex—will revolutionize Nigeria’s economy.
There is an urgent need to look at the cost of governance. The cost of governance in Nigeria is way too high and should be drastically reduced to free up more resources for development. Nigeria is spending very little on development.
Today, Nigeria is ranked among the countries with the lowest human development index in the world, with a rank of 167 among 174 countries globally, according to the World Bank 2022 Public Expenditure Review report.
To meet Nigeria’s massive infrastructure needs, will require $3 trillion by 2050. At the current rate, it would take Nigeria 300 years to provide its minimum level of infrastructure needed for development.
Much can be done to raise tax revenue, as the tax-to-GDP ratio is still low. This must include improving tax collection and administration, moving from tax exemption to tax redemption, ensuring that multinational companies pay appropriate royalties and taxes and that leakages in tax collection are closed.
However, simply raising taxes is not enough, as many question the value of paying taxes, hence the high level of tax avoidance. Many citizens provide their own electricity, sink boreholes to get access to water, and repair roads in their towns and neighbourhoods. These are essentially high implicit taxes. Nigerians, therefore, pay the highest ‘implicit tax rates’ in the world.
Governments need to assure effective social contracts by delivering quality public services. It is not the amount collected, it is how it is spent, and what is delivered. Nations that grow better, run effective governments that assure social contracts with their citizens.
We must rebalance the structure and performance of the economy. A very common refrain in Nigeria, with every successive government, is “We need to diversify the economy.” Nigeria is one of the most diversified in Africa, with the oil sector accounting for only 15 percent of the GDP, and 85 percent is in the other sectors. Nigeria’s challenge is not diversification. Nigeria’s challenge is revenue concentration. This is because the oil sector accounts for 75.4 percent of export revenue and 50 percent of government revenue. The solution, therefore, is to unlock the bottlenecks that are hampering 85 percent of the economy. These include low productivity, very poor infrastructure and logistics, epileptic power supply, and inadequate access to finance for small and medium-sized enterprises.
Nigeria must also shift away from the import substitution approach to export-focused industrialisation. Nations do not thrive through import substitution; they thrive from export-bound industrialisation.
For faster growth, Nigeria must decisively fix the issue of power, once and for all. Providing electricity will make Nigerian industries more competitive when compared to other African countries like Kenya and Egypt. With the support of the African Development Bank, Kenya, under President Kenyatta, was able to expand electricity access from 32 percent in 2013 to 75 percent in 2022.
Today, 86 percent of Kenya’s economy is powered by renewable energy and in one project—the Last Mile Connectivity Project—the Bank’s support allowed Kenya to connect over 2.3 million poor households to electricity—that is over 12 million people provided with an affordable connection to grid power.
Nigeria should invest massively in renewable energy, especially solar. The African Development Bank is implementing a $25 billion Desert-to-Power programme to provide electricity for 250 million people across the Sahel, including the northern parts of Nigeria.
For inclusive development, Nigeria must completely revive its rural areas. Nigeria’s rural areas are forgotten and have become zones of economic misery. To revive and transform these rural economies, we must make agriculture their main source of income, a business, and a wealth-creating sector.
To be clear, agriculture is not a development sector. Agriculture is a business, the development of Special Agro-industrial Processing Zones will transform agriculture, add value to agricultural value chains and attract private-sector food and agribusinesses into rural areas. Special agro-industrial processing zones will help turn rural areas into new zones of economic prosperity and create millions of jobs.
The African Development Bank, Islamic Development Bank and the International Fund for Agricultural Development are currently supporting the implementation of a $518 million Special Agro-Industrial Processing Zones programme in seven states and the Federal Capital Territory.
Nigeria’s best asset is not its natural resources but its human capital. We must invest heavily in human capital to build up the skills Nigeria needs to be globally competitive, in a rapidly digitised global economy.
