Protocols and Welcome
Nigerian Macroeconomic Review
Recently released data from the National Bureau Statistics (NBS) confirmed that Nigeria experienced a full year recession in 2016 with the economy contracting by -1.51%. The fourth quarter 2016 GDP came in negative at -1.3%, after the three earlier quarters had also recorded negative growth of -0.36%, -2.06% and -2.24% respectively. In the whole of 2016, the oil sector contracted by 13.65% while non-oil activities shrunk by 0.22%.
These data merely confirm what Nigerian businesses, consumers and households experienced in the prior year and re-emphasize the urgency of action from government and other stakeholders to ameliorate the situation. At this point, it is important to acknowledge that the Federal Government of Nigeria through the Ministry of Budget and Planning released the much expected Economic Recovery and Growth Plan (ERGP) on March 7, 2017. I will discuss our initial impressions of the plan later on in this press conference.
NBS data confirmed that by the end of 2016, the crude, petroleum and gas sector represented only 8.42% of Nigerian GDP once again reminding us of the urgent imperative of diversifying government revenue and the sources of our exports.We call again on government to aggressively provide incentives and support for non-oil exporters so that a sector that represents less than 9% of economic output will no longer provide virtually all our foreign exchange income, thus leading to the kind of FX constraints that the whole nation faced in 2016 and still faces. We note that the manufacturing sector with 9.27% of GDP infact contributed more to GDP in 2016 than oil (8.42%) and if along with the rest of our non-oil economy, it receives appropriate support to make it more globally competitive, should be able to contribute more to our exports and foreign currency revenue than it currently does. Policy makers must focus on reversing the anomaly in which oil which is 8.42% of GDP provides 95% of export revenue, while the entire non-oil economy (including manufacturing, agriculture, trade, telecommunications, real estate, finance and insurance etc.) which collectively represents 91.58% of GDP provide about 5% of exports!
In terms of sectoral performance, most domestic economic sectors similarly performed poorly in terms of growth in 2016 – manufacturing (-4.32%), construction (-5.95%), Trade (-0.24%), transport (0.39%), information and communication, including telecommunications (1.95%), hotels and restaurants (-5.32%), professional, scientific and technical services (0.80%), finance and insurance (-4.54%), real estate (-6.86%), education (1.35%), health (-1.79%) government (-4.58%) and arts, entertainment and recreation (3.72%).
Other macroeconomic indices also remain problematic. Inflation has reached 18.7% as at January 2017 and capital market performance was and remains dismal, by all parameters.
Fortunately however, there have been some recent positives – oil prices have risen to an average of $55 per barrel post the OPEC oil production cut-backs allowing the Central Bank of Nigeria to accumulate increased foreign reserves. We have also had a successful $1Billion Eurobond offer which may signpost modest improvement in foreign investor confidence in the Nigerian economy. We however have concerns about the relatively high cost of the Eurobond offer and the rising debt service obligations of the country compared to our revenue profile.
THE ECONOMIC RECOVERY AND GROWTHPLAN
We commend the Federal Government for releasing the Economic Recovery and Growth Plan (ERGP) which should provide some degree of policy certainty to domestic and foreign stakeholders on the policy direction of the Nigerian government for our economy. We appreciate the fact that the ERGP was produced through a process that involved consultations with the private sector and hope such consultative posture would be sustained. We share in the broad principles behind the plan – tackling constraints to growth, particularly fuel, power, unfriendly regulations, and foreign currency; leveraging the power of the private sector, promoting national cohesion and social inclusion and allowing markets to work. We also support some specific initiatives and targets stated in the document including the desire to increase oil production to 2.5million barrels per day by 2020; privatisation of specific enterprises and assets; reducing petrol importation by 60%; building a globally competitive economy; and improving infrastructure and the overall business environment.
We urge government to ensure a focused, concerted and effective implementation of all the actions and initiatives contained in the ERGP so that the benefits may quickly accrue to the economy, businesses and citizens, and the nation as a whole.
COMPARATIVE POLICY REVIEW
The part of my address is based on a comparative analysis of seven (7) countries benchmarked against Nigeria with the objective of drawing economic policy implications that may inform policy options Nigeria may consider as it seeks to exit economic recession and return to the path of economic growth and development.
The comparator countries are carefully selected for relevance:-
Ghana:Fellow West African economy; dependent on commodities (cocoa, gold, oil) exports; struggling economy due to fall in commodity prices. Currently receiving IMF assistance.
Saudi Arabia:Major oil exporting country with acute dependence on oil and gas exports; pursuing an aggressive diversification and economic reform programme.
Egypt:Large African economy and population also experiencing severe economic (and political) challenges. Has signed on to an IMF reform programme.
Russia:A major global power with acute dependence on oil and gas exports.
Norway:Major European oil exporting economy that has institutionalised sovereign savings and avoided punishing impact of oil price shocks due to large sovereign wealth fund investments
Indonesia:A large economy and population, major OPEC oil exporter, but with a diversified export base
Angola:African oil exporter, also in OPEC, but with an undiversified export profile
|GDP Size ($’Mn)||Exchange Rate (LCU/$)||Exports Volume ($’ Mn)||Imports Volume ($’ Mn)||Trade Deficit||Budget Deficit (% of GDP)||Trade Deficit (% of GDP)|
Country Policy Reviews
Ghana:Ghana’s major exports are gold, cocoa and oil. The country’s economic performance deteriorated in the last few years, due to the decline in commodity prices. It should be noted that Ghana still imports crude oil and refined petroleum products to supplement local production.
In April 2015, Ghana signed a 3-year $920million facility with the IMF to stabilise its balance of payments.
Ghana’s main responses to its economic challenges have been currency devaluation and the IMF facility. These responses have ensured resumed GDP growth estimated at 4.7% as at Q3 2016
Saudi Arabia:Saudi Arabia is the leading OPEC member with vast oil reserves, a modest population and huge FX reserves.
In spite of its fundamentally stronger position, relative to say Nigeria (with large population, lower oil reserves and low FX savings), Saudi Arabia embraced an aggressive policy response to decline of oil prices, with a strategy focused on diversification from oil:-
In December 2015, McKinsey working for the Kingdom published “Saudi Arabia beyond Oil : The Investment and Productivity Transformation”
In April 2016, the country still working with McKinsey published a new Vision 2030 also anchored on diversification from oil.
The final policy culmination was the “National Transformation Plan” announced in June 2016 which aims to balance the budget, create jobs, reduce subsidies, diversify the economy and develop the private sector.
A key element of Saudi Arabia’s policy response is a privatisation of 5% the national oil company, Aramco slated for 2017/18 that may raise up to $100bn. The country aims to triple non-oil revenue, increase non-oil exports and secure $4Trillion investment from private sources in non-oil sector to create 6 million jobs. It will also establish a sovereign wealth fund.
Norway:The significance of Norway is how as a large oil producer, it has secured relative immunity from oil price savings by institutionalising sovereign savings through a sovereign wealth fund.
The country has also achieved relative export diversification with exports of fisheries and shipping in addition to petroleum and hydroelectric power. Per capita income in Norway is over $65,000!
Norway’s Government Pension Fund-Global with $850bn is ranked 3rd largest in the world behind US and Japan according to Sovereign Wealth Fund Institute (www.swfinstitute.org)
Global Fund Size and Rankings by Country
Egypt:On November 3, 2016,Egypt announced it would float the Egyptian Pound (devaluation). It also announced a fiscal reform programme.Egypt also entered into a deal with the IMF based on a 3 year plan.
These measures led to the massive re-entry of foreign investors who had fled the Egyptian economy due to its political and economic problems. The result was that Egypt’s $4bn Eurobond offer secured multiple over-subscription.
By 2015, Egypt’s GDP growth reached 4.2%. Its exchange rate having depreciated post-floating has recently strengthened validating its floating currency system and economic reform programme.
Russia: Russia suffered severe economic problems due to its dependence on oil and gas exports, as well as Western sanctions due to its actions in Crimea, Ukraine and Syria.As a result, the Russian economy went into recession in 2015 (-3.7% contraction)
The saving grace of economic policy in Russia is that it allowed its currency to devalue consequent on economic crisis, which enabled a “natural” market adjustment and preserved Russia’s FX Reserves of almost $400bn. In 2016, the contraction reduced to -0.6% and the Russian economy is expected to grow in 2017.
The Russian stockmarket recovered in 2016, growing by over 40% and foreign investors are returning, especially for oil and gas plays.
Indonesia: Indonesiais the world’s 16th largest economy by nominal GDP (approx. $940bn in 2016 and $3bn by PPP). The country’s GDP continued on an average 5% growth through 2014-2016 in spite of being a very large OPEC oil exporter and GDP per capita is around $11, 700.00. The country’s poverty and unemployment rates relative to Nigeria are fair, at 11.3% and 6.3% respectively.
Indonesia’s relative macroeconomic stability and superior performance in comparison to Nigeria is because it has substantially diversified its economy, especially exports, selling not just oil and gas, but also cement, food, electrical appliances, construction, plywood, textiles and rubber to the world.
The country’s FX reserves were estimated at over $116bn at December 2016 and its key policies centre around privatisation/private capital, FDI, industrialisation and economic diversification.
Angola: Angola’s recent economic performance has been dismal as a result of falling oil prices, spiralling inflation and rising public debt, in many ways a mirror image of Nigeria!Poverty affects 40.5% of the population, Yet Angola has managed to continue to grow its GDP (4% in 2015) and its GDP per capita at over $5,000.00 is better than Nigeria’s.With 85% of its population engaged in agriculture, the country has not structurally reformed its economy and remains dependent on oil and commodity exports.
Impact on Exchange Rates
- Ghana’s exchange rate has moderated over time in line with macroeconomic fundamentals due to its flexible (floating) exchange rate system.
- While Saudi Arabia has pursued aggressive fiscal and policy reforms, it has kept its exchange rate fixed. Unlike Nigeria, with FX reserves over $500bn, it is in a position to do so until the impact of reforms kick in.
- The Egyptian Pound was devalued as the country floated the currency in 2016. As benefits of reforms, investments and confidence manifested, the exchange rate has been strengthening since November 2016, and particularly in 2017.
- Russia allowed its currency to depreciate when oil prices declined and sanctions hit its economy. Both the currency and capital market have significantly appreciated in 2016.
- Norway’s exchange rate was stable throughout 2016, after devaluation between 2011 and 2015. The country’s macro-fundamentals are strong due to large sovereign savings.
- Indonesia has also developed relatively stable exchange rate movements in 2016 after a period of devaluation between 2011 and 2015. It is important to note that most countries sampled allowed their exchange rates to float in line with exports and balance of payments fundamentals which have provided a natural adjustment vehicle for exchange rates rather than an artificial, forced, fixed exchange rate system that produces black markets, multiple exchange rates, FX scarcity and currency racketeering, and which drives away investors.
- Nigeria and Angola exhibit similar characteristics and outcomes-dependency on oil exports, relatively low sovereign savings, weak and delayed policy responses and episodic currency adjustments rather than gradual, floating exchange rate adjustments.
Policy Implications and Recommendations
Proactive Policy Response: The experience of Saudi Arabia illustrates the need for a proactive, strong and concerted policy response as oil prices began to fall. Unlike the Saudis, Nigeria is yet to articulate and communicate a coherent policy agenda in response to the oil crises. While we note positively that government has now formulated an Economic Recovery and Growth Plan (ERGP) in consultation with all stakeholders and with assistance from McKinsey, this step is perhaps two years late and should be implemented forthwith. We expect ERGP implementation to be based on a strong agenda to diversify exports and government revenue sources; promotion of private capital and investment; deregulation of downstream petroleum; as well as an effective flexible exchange rate system.
Floating Exchange Rate System: The evidence from other economies is clear and compelling to the effect that floating exchange rate systems enable economies respond best to declines in the value of their exports and provide a natural adjustment mechanism to preserve FX reserves and change incentives and behaviour of economic actors. Nigeria’s attempt at a fixed exchange rate system and administrative controls or rationing of scarce foreign currency has clearly failed and produced FX market arbitrage and “round-tripping”; corruption, multiple exchange rates and acted as a deterrence to investment. We commend the recent reforms adopted by the CBN based on the recommendation of the Acting President/National Economic Council and urge the CBN to take these reforms to the logical conclusion-a floating exchange rate system.
Private Capital and Investments: One of the major deficiencies of current policy is the “body language” that suggests an aversion for private capital and investment and a seeming preference for government control of the economy. The evidence from most of the countries examined, especially Saudi Arabia, Egypt, Indonesia and even Russia however indicates the opposite-most oil dependent economies have anchored their post-oil strategies on private capital and investment in oil and non-oil activities. Most investors are interested in the Nigerian economy, but they have been deterred by lack of policy clarity and the confusion over FX. We understand that ERGP articulates a clear policy preference for private capital and expect government to implement clear strategies for promoting such.
The Imperative of Sovereign Savings: Nigeria missed the opportunity of high oil prices between 2010 and 2014 failing to accumulate sufficient sovereign savings to provide a buffer against oil price shocks. We did not learn the lesson that one major reason Nigeria avoided more severe consequences of the Global Financial Crisis and Recession in 2008-2009 was because of the over $65bn accumulated in both foreign reserves and “excess crude account” in that period. This failure to save was in spite of the fact that the nation had created a Sovereign Wealth Fund through legislation. Going forward we must ensure that we save a portion of our commodity-related revenues in view of the inevitability of future declines.
The Case for Targeted Privatisation or “Asset Sales”: The issue of privatisation or “asset sales” has been controversial based on legitimate concerns that such policy may provide an avenue for persons or groups to “corner” precious national assets and further the entrenchment of monopolies and oligopolies in our national economy. In spite of these concerns, which we share, we cannot refuse to examine asset sales as an option in funding the economy in this recession. In particular, we believe government may consider some specific sales of assets such as:-
- Conversion of the upstream oil sector JVs into incorporated JVs with the government reducing its share in those IJVs as a means of improving governance and raising resources for infrastructure
- We support full privatisation of government-owned refineries and privatisation or long concessions of all federal government-owned airports
- Government may also consider selling not more than 20% of its holding in NLNG to the current private investors in the company.
- Government should use these processes to expand the capital market through listing of privatised assets on the NSE and also encourage/guarantee host community participation.
The Role of the IMF: Nigeria appears to have peremptorily ruled out an IMF facility as an option in resolving our balance of payments problem, unlike Ghana and Egypt both of which appear to have benefitted from facilities from the fund. While we are not in a position to determine whether or not the country should obtain such a facility, we advise that no policy option should be dispensed with merely on populist considerations. Nigeria needs injection of foreign currency on the best terms possible and should consider all options based on their relative merits and demerits.
Interest Rate Policy: One consequence of the monetary authorities fixation on maintaining an artificial fixed exchange rate has been the high interest rate regime. The CBN has maintained monetary policy rate at 14% in spite of the economic recession which would have suggested a different policy response-lowering interest rates to stimulate economic activity. We believe that within the context of our previous preference for a floating exchange rate system as the ideal policy response in our circumstances, that it is time for CBN to abandon its monetary tightening posture and move towards a monetary easing and a lower interest rate regime in order to boost productive activities in the economy.
Government Borrowing: Data presented on the next two slides show that Nigeria’s domestic and external debts have risen significantly since 2014, and particularly in 2015 and 2016. Our domestic borrowing has risen from N577bn in 2013 to N1.18Trillion by 2016 while total borrowing (external and domestic) has grown from just N614bn in 2014 to N1.8Trillion in 2016 and a projected level of N2.3Trillion under the 2017 budget!
More worrying is the fact that debt servicing obligation now represent about 35% of total budgeted revenue in both 2016 and 2017 suggesting that Nigerian government borrowing is probably unsustainable. We also note that while the successful and multiple oversubscribed $1billion Eurobon represents a vote of confidence in Nigeria’s economy, at over 7% coupon, it was highly priced.
In our opinion, the sustainable funding strategy for the Nigerian economy should focus on private investment/FDI rather than concentrating on unsustainable borrowings. Government may also have to review its tax policy.
Tax Policy: We conducted a comprehensive benchmarking of company income tax, personal income and VAT/sales tax rates of 30 global economies.
We believe on the evidence that Nigeria’s CIT rate of 30% (plus 2% education tax) lies on the upper threshold and should be reviewed downwards to 20-25%. We find that Ghana, Cote D’Ivoire, China, Malaysia and Indonesia all tax corporate profits at 25% while UK, Saudi Arabia and Russia use 20%. Countries in-between include Portugal (21%), Botswana (22%) and Egypt (22.5%) while South Africa’s rate is 28%.
On the other hand, it is incontrovertible that Nigeria’s 5% VAT rate is far below that of comparator countries and at an appropriate time may be increased to 10%.
Minimum Wage: Given the depreciation in the value of the Naira as well as inflation currently at 18.6%, a strong case can be made for raising Nigeria’s minimum wage. However we counsel that, such a step be preceded by a comprehensive review and restructuring of the public services of the federal, states and local governments. Given that such restructuring may not be expedient in this period of recession and rising unemployment, our recommendation is that a review of the minimum wage should be deferred until the economy has resumed strong growth and public sector finances have improved.
Power Sector Issues: One of the problems that continue to plague the Nigerian productive sector and businesses generally is the continuing acute electricity supply deficits in the country. While we do not support a reversal of the power sector privatisation, we believe government must hold the “discos” and “gencos” to their obligations and promises before assuming ownership of these entities. We also believe government must demonstrate good faith by paying up all its debts to the power distribution companies and continue to invest in the transmission system to improve transmission capacity.
Finally government should sustain and accelerate efforts to reach a political settlement in the Niger-Delta to put an end to sabotage of oil, gas and power infrastructure.
Nigerian individuals, households and businesses have experienced a tough time in the last two years. We hope that all stakeholders, particularly government will put all hands on deck to ensure an end to recession, the resumption of growth and indeed accelerated economic development in this nation. We urge government to focus on clinical and swift implementation of the initiatives and actions included in the ERGP as well as other ideas presented to them by the OPS, including the recommendations I have just made in this address.
On our part, as NECA and OPS, we stand ready to do our utmost best to ensure sustained and inclusive growth and development in the Nigerian economy.
LARRY E ETTAH
MARCH 9, 2017