A long but necessary read for anyone wanting a somewhat fair analysis of Nigeria's real current economic situation that is in contrasts to what the incompetent Government of the day is stating . It is noteworthy that this article highlights the sack of Babalola , over his NNPC bankruptcy announcement, as an indication that Jonathan's government believes in getting rid of those who speak the truth rather than effectively tackling serious economic challenges . Now the whole pyramid is falling and the economic bleakness GEJ and his team deliberately contributed to , and now try to hide, is being exposed locally and internationally. Below , for example, is a citation of what should be happening yet GEJ's government is ineptly and profligately doing precisely the opposite of what is required to secure economic progress: Pat Utomi, a professor of political economy, said “cutting down on protocol, size of cars and retinues and all of that. We have on hand a national crisis of cost that should force government today to deeply rethink the cost of governance, so that it does not go borrowing just to sustain the profligate lifestyles of public office holders and so trade off the economic fundamentals that would enable the Nigerian economy to continue to grow.”
http://www.tellng.com/contentdisplay.aspx?page_id=10&id=137A Romance with Bankruptcy
It is no longer news that the Nigerian economy is on the precipice. What is strange, however, is the reluctance of the officials of government to embrace solutions proffered by experts
By SALIF ATOJOKO
It is a paradox that has dumbfounded many Nigerians. Economic experts are convinced that the dynamics of the Nigerian economy are hovering within negative zones which constitute grave dangers if not checked. Fitch Ratings, an international rating agency, delivered the most telling of such verdicts when it downgraded Nigeria’s sovereign credit rating from stable to negative recently. The import of it is that there is a deterioration of the fundermental indica tors of the economy. The Fitch rating merely drove home the point that had been made by several concerned Nigerians in recent times. But rather than accept the verdict, which was based on verifiable claims, key officials of the government are labouring hard to disprove it.
Citing the depletion of Excess Crude Account, ECA, and heightened political uncertainty ahead of next year’s elections, Fitch said Nigeria’s current BB-, three notches below investment grade, constituted a threat to economic stability. “The depletion of the ECA and continued gradual fall in international reserves at a time of high oil prices and record high oil production is a major concern,” said Veronica Kalema, director, Middle East and Africa, Sovereign team, Fitch Ratings. While acknowledging plans by the federal government to establish a sovereign wealth fund, SWF, to be governed by more robust prudential guidelines, and removal of the fuel subsidy currently taken out of the ECA, Kalema said the implementation of these plans is not possible before the general elections expected to be held in April next year, which have increased short-term political uncertainty.
The Fitch rating gave many Nigerians food for thought. They consider it ironic that the country is close to bankcruptcy at a time when more funds are accruing to the Federation Account with crude oil price steady at around $75.9 per barrel, pb, above the $65 pb benchmark on which the budget was predicated. Besides, the country’s production output has shot up to about 2.5 million barrels per day. Amazingly, within the last two years, the external reserves fell from $61 billion to $36 billion, while the $22 billion left in the ECA, in 2007 by Olusegun Obasanjo, former president, has been depleted to a mere $460 million. About $2 billion of the funds were shared by the three tiers of government in this July after another $4.8 billion was withdrawn in March to augment the shortfall in the Federation Account. Earlier in 2009, $12 billion was withdrawn. Of the entire amounts withdrawn from the account since 2007, only the $5.34 billion withdrawn in 2009 was used to fund the construction of new power plants, as well as a transmission and distribution system; the rest were shared by the three tiers of government.
Since the beginning of this year government has spent $1 billion on the 50th anniversary celebrations, the purchase of three new jets for the presidential fleet, and prepartion for the 2011 elections. A salary increase for civil servants and the military and police will cost the government an additional N267 billion this year. Besides, federal legislators are also seeking to double their quarterly allowances. In July, the Senate passed a supplementary budget worth $4.3 billion, from which the wage increase will be funded.
To meet the persistent shortfalls in the Federation Account, the government has, apart from the ECA, also turned to the international markets for borrowings. More than $5 billion of foreign loan will be taken this year, which will more than double the current debt level, apart from a $500 million international bond that will be launched before the end of the year. Within 18 months, the country’s debt portfolio has risen from $18.45 billion at the beginning of 2009 to $29.6 billion by June 2010, an increase of 60.4 per cent. This is accounted for mainly by the sharp increase in the country’s domestic debt stock, from $14.7 billion at the beginning of 2009 to $25.3 billion by June 2010, compared to its external component, which went up from $3.75 billion to $4.3 billion within the same period. In 2006, Nigeria became the first country to have a greater part of its foreign debt forgiven; in the process getting rid of the infamous $30 billion Paris and London clubs debts. That move left the country with only $3.5 billion as foreign debt.
President Goodluck Jonathan recently wrote to the National Assembly seeking approval to borrow a total sum of $4.455 billion from seven foreign development agencies to fund power and sundry projects. But the request did not go down well with majority of the members who vehemently rejected it. This return to borrowing by all levels of government has not gone down well with stakeholders in the economy, who argue that for a country that only managed to exit the Paris Club in 2005, returning to borrowing was not in the overall interest of Nigerians. There are now fears that the high debt profile may prevent the private sector from getting access to credit, a development that does not augur well for any economy.
The fear being expressed in many quarters is that the increasing spate of domestic and external borrowings would further impoverish future generations of Nigerians, if the country does not tread with caution. With Nigeria’s history of corruption and a general lack of transparency, such a high debt stock within a short time is a source of concern to many observers, particularly in the absence of verifiable projects being financed with the debts.
The damning Fitch verdict on the Nigerian economy did not come as a surprise to Nigerians at all. For instance, Henry Boyo, an economist, said the Nigerian economy was never running smoothly at any time in the last 15 to 20 years. According to him, inflation has never truly fallen below 10 per cent, unemployment has never reduced in the last 10 years, industrial capacity utilisation has never increased in the last 15 to 20 years. “So why are we talking of Fitch ratings, when in reality we have been retrogressing for the past 15 to 20 years?” Boyo queried. He even questioned the integrity of Fitch and other rating agencies which gave the country favourable ratings in the past when unemployment and inflation were rising and industrial capacity utilisation was falling. “On what basis were they giving the positive ratings? So, if they now give unfavourable ratings, even under the present circumstances, we should even ask ourselves, the reasons that they gave. They said our reserves are falling, 50 years ago our reserves were not these high. South Africa’s reserves are less than ours. South Africa has only about four or five months import cover; our own will still cover us for 25 months,” continued Boyo.
By implication, Boyo is saying that the rating of some international organisations may not reflect the situation on the ground in Nigeria. So to what extent can we rely on such reports to gauge the performance of our economy or project forward? For instance, recently the International Monetary Fund, IMF, ranked Nigeria as the third fastest growing economy in the world, after China and India, with gross domestic product, GDP, growth of 5.0 per cent in current rating. It noted that the country’s oil demand strengthened more than expected in the first half of 2010. According to the global body, Nigeria’s output growth is expected to accelerate above 7.4 per cent in 2011 based on increasing demand for Nigeria’s oil by China. But the IMF position is largely dependent on the anticipated rise in oil revenue, when there are no indications as to the possibility of any reasonable growth in the country’s non-oil sector. The IMF did not also take into consideration the fact that even as the country makes extra revenue from oil above the benchmark for the budget, the government is also increasing foreign loans.
Perhaps that is why Boyo and other experts dispute the growth claims by IMF. For instance, Boyo believes that if inflation is running at 10 per cent each year and unemployment continues to rise in spite of how much money is in the system, then something is fundamentally wrong with the economy. “If industrial capacity utilisation has never even risen past 40 per cent in the last 15 years, you have to know that something is wrong with that economy. If you have earned so much dollars and you have no roads to transport your goods, you cannot feed your family, you do not need any economist to tell you that something is wrong with the system. You can see that things are negative. So, the question becomes redundant. Interest rate in America and Europe are almost close to zero per cent; our own is still 20 per cent, meanwhile the same banks are receiving deposit at two per cent. The same banks are prepared to lend to government at four, five or six per cent. But they are not prepared to lend to the real sector. Why? The answer is simple. It is an indication of the fragility of the structure of these banks,” said Boyo.
Chidi Odinkalu, senior legal officer (Africa), Open Society Justice Initiative, a non-governmental organisation, said the fact that various tiers of government are going to the bond market just before the election is a clear indication that the funds being raised are not for capital expenditure or any other investment in the economy, but for election. Besides, he said there is no evidence to suggest that the government has the capacity to invest the funds borrowed from external sources wisely for the benefit of the people. He attributed the problems of the economy to lack of economic literacy and access to economic information by key officials of government. “For instance, if we are depleting our foreign reserves and the ECA, at the rate at which it is going, the question is where are those funds being applied? Are such items of expenditure covered in the appropriation act? If not, why not?” Odinkalu asked.
The implications of excessive borrowing are grevious for macro-economic policy making. According to Odinkalu, in the context in which the banks are not lending and the financial services sector is more or less inactive, higher debt or borrowing on the part of the government could also mean higher cost of money, which would mean higher interest rate and lower investment capability. In his view, all the parameters clearly suggest that Nigerians are in for a fairly difficult time.
To the ordinary Nigerian, the rising debt stock is an indication that the country is broke. When Remi Babalola, former minister of state for finance, dared to say that the Nigerian National Petroleum Corporation, NNPC, was insolvent earlier in July, he ran into trouble over his claims and had to quit the Jonathan administration. Babalola had claimed that the NNPC, seen as the major cash cow of the government, was insolvent and incapable of meeting its obligations. The statement caused ripples in government, as various officials of the administration took pains to refute it. The Federal Executive Council, FEC, reprimanded Babalola, and Olusegun Aganga, minister of finance, was particularly livid. “NNPC, from the auditor’s account, is a going concern and does not have solvency issue as a corporation. Therefore, categorically, NNPC is not insolvent. Given the nature of NNPC, there are regular transactions between the federal government and NNPC; and as a result, there are always outstanding balances between the corporation and the federal government,” Dora Akunyili, information minister, said in reaction to Balalola’s claims. It was not surprising, when four weeks later Babalola was redeployed to the ministry of special duties. The general impression in the Presidency was that Babalola had paid the price for ‘embarrassing the government’ with comments on NNPC’s financial health.
In Aganga’s school of thought, the current foreign debt burden of the country is comfortable and below the international debt sustainability ceiling relating to Nigeria’s peer group. The Debt Management Office, DMO, has defended the borrowing, saying that it will help reflate the economy, as well as deepen the bond market. The DMO said the financing gap needs filling through borrowing because of the need to minimise exposure to external vulnerability and also develop the domestic debt market. Aganga dismissed the Fitch verdict on Nigeria’s economic outlook as ‘unduly punitive’ and as not taking into account positive features of the country’s economy. But he acknowledged the decision of the agency to retain the sovereign rating of the country which he said underscored the fact that ongoing reforms being implemented by the federal government were on the right track and that the prospects for economic growth remained bright.
Indeed, contrary to the Fitch report and the general conclusions drawn by other experts, Aganga and Lamido Sanusi, governor of Central Bank of Nigeria, CBN, have been painting a rosy picture of the economy, insisting that the economy is relatively healthy. For instance, Sanusi said the inflation rate stood at 11 per cent as at May, from 14.3 per cent in the first quarter, a sign that inflation is loosening its grip on the economy. Activities in the agricultural sector and commerce, key drivers of the economy, according to Sanusi, grew by 7.68 per cent between April and June 2010, up from 6.68 per cent in the first quarter.
However, most Nigerians are wallowing in poverty in the face of rising youth unemployment put at 50 per cent in urban centres. The rate of unemployment in the Nigerian economy is reportedly one of the highest in the world today with most sectors of the economy experiencing job losses. As at May 2009, the unemployment figure stood at about 19.7 per cent, from 14.9 per cent recorded in March 2008. The figure for 2010 is not yet known. The output of the manufacturing sector has similarly reduced from 7.03 per cent in 2009 to 6.43 per cent in 2010, due to lack of electric power and paucity of credit. According to the Manufacturers Association of Nigeria, MAN, over 50 per cent of its members have closed shop over the years due to the prohibitive cost of doing business in the country.
Goke Oyeyemi, an economic analyst, said it is possible for Nigeria to be broke in spite of the high prices of oil and steady crude production. He explained that Nigeria as a member of the Organisation of Petroleum Exporting Countries, OPEC, was constrained because of the quota regime of the organisation and could not use the availability of the product and its stable price in the international market to its advantage. Another reason for which Oyeyemi said Nigeria could be broke is budget deficit financing. “The country has budget deficit that is over a trillion naira which has to be financed somehow. This is why the federal government is floating bonds, the bonds are being used to finance the deficit,” Oyeyemi told the magazine.
Experts generally agree that the type of government the country runs also has a direct negative impact on the state of its purse. It is beleived that the country is running an bloated government with too many layers that are not adding any value to governance. “How can we justify paying lawmakers $1 million per annum? This money is more than what Barack Obama earns as the President of the United States of America. And all these so-called lawmakers have a retinue of staff and assistants that are busy doing nothing and collecting fat salaries and allowances. All these are part of the cost of running government; they eat up the revenue base of the country while they add no value whatsoever,” Oyeyemi said.
Chukwuma Soludo, the immediate past governor of the CBN, first raised an alarm, warning that the recent massive government borrowing at a time the economy was supposed to be experiencing a boom was bad, since much of it was not being ploughed back into economy. Soludo said at current gross domestic product, GDP, and population growth rates, Nigeria will still be a developing country in 2060 (below $11,000 per capita income). “The tragedy is that the country has no implementable plan to steer a different outcome. Under the current political economy, the Vision 2020 will remain what it is – a beautiful dream! Neither the investment levels nor the productivity (given the decaying educational system and poor skills) required to realise Vision 2020 will happen,” he argued. Soludo’s remarks jolted the Jonathan administration, forcing an immediate reaction by the FEC that Soludo’s economic thesis was faulty. Labaran Maku, minister of state for information and culture, said there was more confidence in the Nigerian economy, contrary to the former CBN governor’s ‘prophecy of doom’.
Recently, Atiku Abubakar, former vice-president and presidential aspirant on the platform of PDP, had raised similar concern on the sloppy trend in the economy, especially the depletion of the external reserves and called on Jonathan to take urgent steps to halt the slide. He is not the only Nigerian who has admonished government in spite of its defensive posture. Ngozi Okonjo-Iweala, World Bank managing director, cautioned that if the debt profile continues to rise Nigeria will be back to the pre debt-forgiveness days. “Nigeria should not accumulate any more domestic debt because it is going to lead to some of the ills we came out from. It is not only external debt that leads to choking and clouding out of the private sector. There is no problem with external debt for Nigeria. The external debt of Nigeria is low enough, but Nigeria has to pay attention to domestic debt and stop accumulating that," Okonjo-Iweala explained. Onno Ruhl, World Bank Country Director for Nigeria, counselled the federal government to cut down, particularly on recurrent spending. “If you look at the current trend, our worry somewhat is the high levels of government spending and the equally high deficit levels that we have been witnessing since 2009. It is time for the government to be a little bit more careful about the spending levels and we see a very strong increase in borrowing by the government,” he explained.
A similar counsel was issued by the International Monetary Fund, IMF, when the federal government announced plans to establish a sovereign wealth fund, SWF, to replace the ECA late last year. It, however, advised government to evolve a clear-cut policy in order to pursue more meaningful development projects. This advice is against the background of the lack of fiscal discipline on the part of the government at the federal, state and local government levels; as there has always been a huge gap between what each tier of government earns from oil revenue and the rate of development.
Rather than disputing the Fitch verdict, experts expect the governemnt to take steps to salvage the economy. Razia Khan, regional head, research, Africa Global Research, said the Fitch assessment had also a clear guidance on what would be needed for Nigeria to see its rating improve such as institutionalisation of oil savings, fiscal improvements including a removal of fuel subsidies, and greater overall transparency.
The danger in not taking appropriate steps to remedy the situation, according to Khan, is that investors will exercise a greater degree of caution until there is more clarity on potential outcomes of the forthcoming elections which heightens the political risks of the nation. Nigeria, he said, has much strength in terms of favourable external liquidity, growth potential, scale and strategic importance, which still make it the African economy to watch.
The Fitch eggheads and other experts were emphatic that the current economic team and the new government that will emerge from next year’s elections must undertake key institutional and structural reforms to return the outlook to stable. These include a fully operational SWF with safeguards shielding it from the election cycle and political pressures in general; removal of the fuel subsidy, which would assist in rebuilding the stabilisation fund and encourage investment in downstream petroleum; and reforms that would encourage infrastructure investment necessary for economic diversification, sustaining non-oil sector growth and raising per capita incomes. Further improvements in data quality and transparency would also benefit the ratings.
The Fitch recipe for revamping the economy tallies with local prescriptions. Sam Ohuabunwa, chairman, Nigerian Economic Summit Group, NESG, said Nigeria requires so much investment to build infrastructure, social services and provide the template for the country to reach its goal of becoming one of the 20 leading economies in 2020. Other experts said Nigeria must be able to provide a conducive environment for foreign direct investment by providing a level playing field and that can only be made possible with transparency and accountability, ensuring that government has adequate revenue to provide infrastructure and that government officials do not squander the revenue.
The expectation of many Nigerians is that oil and gas sector should naturally give the nation the derivatives to generate revenues that can be translated into investments to underpin the rest of the economy in terms of provision of infrastructure, creation of jobs, education and health care. It is believed that only then will oil wealth be of value to the country. It is also expected that when the Petroleum Industry Bill, PIB, the mainstream legislation on the oil and gas industry, currently before the National Assembly, is passed into law, it will boost investment in the sector and enthrone a new era of transparency and accountability. Experts, however, warn that it would be a big mistake to rely on oil revenue to drive growth. Ruhl thinks other sectors such as whole sale and retail, entertainment, telecommunications, the financial sector, agriculture and agribusiness, construction, should be the sectors driving growth in Nigeria.
Experts have also reiterated the need to cut down the cost of running government, if the opportunities for economic growth are not to be frittered away. Pat Utomi, a professor of political economy, said “cutting down on protocol, size of cars and retinues and all of that. We have on hand a national crisis of cost that should force government today to deeply rethink the cost of governance, so that it does not go borrowing just to sustain the profligate lifestyles of public office holders and so trade off the economic fundamentals that would enable the Nigerian economy to continue to grow.”
Concerned about the poor leadership quality of the country, the World Bank has cautioned Nigerians to settle for aspirants with the potential to harness the nation’s vast resources for the benefit of the people. Ruhl said if he were a Nigerian he would be looking out for a candidate in the forthcoming elections that can ensure value for every public spending. Similarly, Ohuabunwa is of the view that until Nigerians begin to look at governance as business, the country would not get anywhere. He believes that all those aspiring for political leadership in Nigeria at all levels must show evidence of effective leadership in their previous assignments in the public or private sector.
With that kind of leaderhip in place, appropriate legislations, complete diversification of the revenue base of the economy, and a commitment to transparency and good governance, perhaps, Nigeria could be on its way out of economic doldrums and reverse the negative outlook by Fitch Ratings.
Additional reports by RAYMOND MORDI,
FUNKE ODUWOLE
and AYODEJI ADEYEMI
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