Dr Olisa Agbakoba, SAN writes
The massive macro-financial shock caused by Covid-19 has continued to ravage the global economy putting all systems and nations under severe financial instability never seen in history. Stock Markets around the world have been pounded and ravaged, and oil prices have fallen to an all-time low. Nigeria is not spared from this crisis. Total revenue expected to be realised from the 2020 National budget was N8.42trillion. However, following the Covid-19 pandemic, revenue projection was reduced to N5.16trillion. This represents a drop of close to 40% or N3.26trillion. Key sectors like manufacturing, maritime, aviation, hospitability and the creative industry, collapsed resulting in huge financial and job losses. The first-quarter report of the Nigerian Bureau of Statistics (NBS) shows a slow-paced growth of -0.68% as GDP contracted by 1.87% when compared to the fourth quarter of 2019. If this continues into the second quarter there are ominous signals of an impending recession. The World Bank 2020, Global Economic Prospects, June 2020, forecast that the Covid -19 pandemic will plunge all countries into the worst recession in history. GDP of advanced economies are projected to shrink by 7 percent. The outlook for emerging market and developing economies is bleak as they are forecast to contract by 2.5 percent. This would represent the weakest showing by this group of economies in at least sixty years. The crucial issue is – How do we avoid and or minimize the impact of inevitable recession on our economy?
The first and critical policy action is to harmonize fiscal and monetary policy. Fiscal policy must be expansionary. In other words, big spending is required to massively stimulate the economy. This is called Keynesian economics named after the economist John Maynard Keynes. Keynesian economics served as the standard economic model in the developed nations during the latter part of the Great Depression, World War II, and the post-war economic expansion (1945–1973). American President, Franklin Delano Roosevelt used the Keynesian economic model by spending massively on public works programs to get America out of the great depression. The mantra for Nigeria is to spend big to get out of recession. We acknowledge the government has adopted an expansionary policy by borrowing massively but we must have a clear strategy. First, we must determine our Public Sector Borrowing Requirements (PSBR). Additionally, we will need to identify an inventory of Public Sector Spending Requirements (PSSR). The PSBR and the PSSR should be indexed to identify funding gaps. Additionally an inventory of government assets should be created as we have many wasting assets that can be converted to cash. Using the abandoned Federal Government Secretariat in Lagos as the index case, informed valuers believe it has a forced market value of N100 Billion. This can build the East West Road. Abandoned projects abound, Ajaokuta Steel, Aladja Steel, the Newsprint at Iwopin, the various steel rolling mills around the country, the Onitsha Port, etc. It is believed these assets are worth at least N15, Trillion yet untapped. These wasting assets, if sold will boost fiscal policy immensely. Turning to Monetary Policy, we clearly need a very flexible monetary policy with interest rates pegged at no more than 5% (Single-digit) to create a framework for quantitative easing and open market operation (OMO).
Quantitative easing (QE) makes borrowing easy for business. QE makes burden on business lighter. OMO flood the economy with liquidity. A harmonized fiscal and monetary policy will lay the foundation to rebuild the economy. Three requirements to avoid a recession are Job creation, revenue mobilization and control of cost of governance. If we get the macroeconomic environment right, which is the alignment of fiscal and monetary policy, it will release economic energy to create Jobs estimated at between 5 and 6 Million, year on year. With respect to revenue generation with the right framework, massive funds can be generated and pumped into the economy. With respect to cost of governance, everybody knows it is far too high. In the revised 2020 budget, 73.5% of total expenditure are for salaries and debt servicing, while only 26.5% are for capital expenditure. This is unsustainable. We cannot continue to borrow to pay high recurrent bills. Rather we must invest in capital expenses to reflate the economy. The Government has taken steps to implement the Orosanye report but there needs to be a timeline for implementation. Corruption is a leading cause of high cost of governance. It is important to review anti-corruption strategies to reduce public corruption. Tackling the menace of big government and public corruption will give us more balanced revenue to debt profile. With the macroeconomic framework highlighted above, we can now review some critical factors that can help grow the economy and avoid recession.
Diversification of the Economy
This is one area government needs to urgently activate because of the massive budget deficit. Nigeria runs a mono –cultural economy as 85% of her revenue is derived from crude oil exports. As a result of the price shocks occasioned by Covid – 19, crude oil receipts have gone down and are no longer able to sustain the economy. The total revenue expected to be realised as stated in the 2020 budget is N8.42trillion, including a deficit of N2.17t. However, following the Covid -19 pandemic, fiscal deficit has grown from N2.17t to N5.37t, which must expectedly be financed by fresh borrowing. We are now running a deficit budget and borrowing massively. Unless we diversify the economy, we will continue to borrow to the point where it becomes unsustainable. Many governments have paid lip service to diversification, but this is the time to develop a very strong policy on diversification. We must follow the example of the United Arab Emirates which diversified their economy by reducing dependence on oil receipts from100% to only 35% by going into service and smart industries. Some of the sectors to diversify our economy are;
Agriculture is one of the largest contributors to Nigeria’s GDP and has the potential to create massive numbers of new Jobs, especially in Northern Nigeria that has very fertile agricultural land. But our policy on agriculture must move away from subsistence to mechanized agriculture. The Central Bank of Nigeria’s Anchor Borrowers programme that made Nigeria self-sufficient in rice production has shown the potential of the Agriculture Sector. The Central Bank has identified 10 crops to support namely rice, wheat, milk, tomato, fish, cotton etc. This is a great leap forward for the sector. Mechanized Agriculture will not only create Jobs but also improve National Security by offering employment to our teeming youths exploited for banditry and terrorism.
This is a massive sector that can create millions of jobs and billions in revenue. But the starting point is to have a cohesive multi-model transportation policy to take care of the 4 critical sectors of air, sea, road, and rail. Once there is an effective transportation policy it will impact each of the 4 sectors in the following ways:
Aviation is a major transportation sector. Unfortunately, Nigeria has no presence in the international Aviation business. Nigeria Airways has long been comatose. Foreign aircraft dominate the Nigerian airspace and earn well over 2 trillion Naira annually to our exclusion. 2 trillion Naira is substantial in our national budget. A Fly Nigeria Act will ensure that public funds to purchase air tickets must originate and fly on a Nigerian carrier. The Fly Nigeria Act will create an instant market of goods, passengers and services for our national carrier. Jobs will be created and revenue generated to the advantage of the economy.
Space technology is huge. The late English theoretical physicist and cosmologist, Stephen Hawking referred to space as the future of mankind. Regrettably, Nigeria is not harnessing this sector. Space has many major applications for developing our economy. We will mention two examples. First, space can be applied to the energy sector as remote sensing establishes the quantum of our hydrocarbons. Second, is the link between space and national security. Satellite technology intelligence gives us vital footprints in the national security infrastructure. The growing threat of terrorism and the adverse impact on economic stability can be checked by intelligence provided by space satellites. Nigeria has no space legislation. This hurts economic transformation.
Railway and Road Transport
The opportunities for rail and road are unimaginable. They connect people and open markets so goods and services are exchanged. Government is investing heavily in this sector but a lot more investment is required. The CBN recently launched InfraCo, a $39 Billion (N15 Trillion) infrastructure development fund but N15 Trillion is not enough. Rail and roads need a lot more investment because its revenue and job potentials are huge. The Post-COVID economy must create what is called socialized jobs. American President, Franklin Roosevelt used social jobs to push America out of the Great Depression, by creating the Tennessee Valley Authority, and employed over 4 million people. To accomplish all these, a strong Public-Private Sector Partnership (PPP) is vital.
This sector has been completely ignored but it has the capacity to generate over Seven Trillion Naira annually and four million jobs over 5 years. All that is required is the implementation of local content and Cabotage rules especially relating to the oil and gas sector which is currently dominated by foreigners. Our Cabotage legal regime must be enforced to stem capital flight and boost capacity for Nigerian Ship owners. Several critical bills relating to the maritime sector pending before the National Assembly require immediate enactment and implementation. Some of the bills are the Petroleum Industry Bill (PIB), the Ports and Harbour Bill, Maritime Zones Bill, Ocean Bill etc. There is also an urgent need to review the Nigerian Shipping Policy Act of 1987. The enactment of a law on maritime zones is also long overdue. The Maritime Zones bill will extend Nigeria’s EEZ of 200 nautical miles by another 150miles. This will create massive new revenue streams and generate jobs in the maritime sector.
Hydrocarbons and Solid Minerals
Although oil receipts are down, our huge gas reserves present opportunities for alternative revenue sources. Russia’s revenue from gas exports in 2017 was $ 38.1 Billion. The success of Nigeria’s LNG has demonstrated that gas revenue is massive but only if exploited. Nigeria can also derive revenue from petrochemicals like methanol which Nigeria currently imports. But the legal framework must be right. The legal framework relating to hydrocarbons is skewed in favour of foreign companies in the entire value chain. In at least four cases, banking, insurance, shipping, legal service, capital flight is massive. In relation to shipping alone, it has been suggested that Nigeria loses over 10 Billion Dollars annually. Revenue loss will continue unless the legal framework is amended to domesticate the value chain in hydrocarbons. It is important to review the legal framework for local content with a view to strengthen implementation and enforcement. It is also very important to address the issue of corruption in the extractive industry. The continuing lapses and loss to the nation in oil and gas revenue as revealed in the Report by Nigerian Extractive Industries Transparency Initiative, NEITI, which indicate lack of implementation of previous Reports, supports this. To ensure speedy reforms in the oil & gas sector, the Petroleum Industry Bill has to be passed into law. Our hydrocarbon resources especially gas is absolutely a major source of revenue, and employment.
Solid mineral is another sector that has not been adequately harnessed. Nigeria is estimated to have about 34 solid minerals, with every Nigerian state boasting of at least one of these minerals. This can generate $ 10 Billion and 5 million Jobs. The Democratic Republic of Congo in 2017 alone saw the sector generate $ 1.68 billion, accounting for 55.16% of the total government revenue and 17.40% of the GDP. Solid minerals is undoubtedly capable of making a more pronounced impact on the country’s employment rate and generating more revenue for the government however, to derive the highest possible benefit from this sector, a proper policy and legal framework needs to be put in place.
Nigeria can leverage its status as a multi-billion-dollar tech hub to develop its IT sector and become a global IT services destination. Github, a leading software development platform, recently reported that Nigeria is home to the fastest growing developer community on their platform. The country has benefited from companies like Andela which brought world-class training and job opportunities to budding Nigerian programmers. Gebeya is promoting a similar model of training the next generation of African developers. Nigeria’s growing supply of programmers will likely be met with rising demand from the country’s constantly expanding tech hubs. The potential of the business-to-business (B2B) or enterprise software sector is also good news for the country’s ITC sector. African companies are expected to spend $3.6 trillion on B2B services in 2025. Nigeria is well-positioned to be part of this growth given the coexistence of traditional industries and B2B tech startups. The combination of a growing local talent pool and a bustling B2B sector means that the IT sector can drive economic growth for decades to come.
Nigeria’s entertainment industry already plays an important role in the Nigerian economy but their full potential remains untapped. The industry was projected to generate $1 billion in export revenues this year and bring in crucial foreign currency. The industry has an added benefit over the natural resource sectors since entertainment products are non-rival goods. This means that the local consumption of a movie or a song, for example, does not prevent the export of that same song to international markets. This allows Nigerian entertainment products like songs, movies, and books to generate wealth indefinitely. The entertainment industry drives job growth and employs millions of Nigerians in complex value chains. Nollywood, Nigeria’s film industry, produces an average of forty films a week and directly employs 300,000 Nigerians. Nigeria’s upcoming fashion industry is perhaps the best example of old value chains meeting new ones: designers are using local cotton to create garments being modeled at international fashion weeks. The fashion industry directly employs and benefits farmers, distributors, designers, and more.
Nigeria has no trade policy which is why it is a major dumping ground for foreign goods. We spend billions of dollars importing basic food commodities that can grow locally. We must grow what we eat. We need to reverse this with a robust trade policy. Trade policy refers to the rules and regulations on imports, exports, tariffs, duty etc. Trade policy rests on a tripod of critical factors – import substitution, tariffs, border enforcement and compliance. We need to enact trade remedies legislation and a trade Expansion Act. These legislation will impose anti-dumping duties on non-essential products. There are also special duties and measures we can impose on exports into Nigeria which are subsidized by a foreign country. The trade remedies legislation will prohibit imports if it is adjudged that they will cause material injury to local industries, for example by impeding local growth. It is also important to enact legislation that will support the recently established Nigerian Office for trade negotiation (NOTN). It is crucial that the office is elevated to ministerial level. We need to establish a National Customs and Border Enforcement Services. This Border Enforcement Services will need new legislation to merge immigration and customs services. The Border Enforcement Service will replicate the US Customs and Border Enforcement Agency. The merged service will reduce duplication and proliferation of agencies at the borders. To comply with ECOWAS protocol and the African Continental Free Trade Agreement (AfCFTA), the border closure policy should be replaced by a border enforcement policy. A strong trade policy will help create millions of jobs, grow local industries and expand the economy.
Access to Capital
Capital is the oxygen and life blood of the economy. One of the areas where we can tap into capital is the Housing/property market. Eighty per cent (80%) of Nigeria’s businesses rely on land and housing as collateral. Unfortunately, the slow administration of the Land Use Act in terms of consents and permits has meant that the banks have not accepted untitled property as collateral. This has caused incalculable damage to businesses in need of capital. A recent study shows that the housing inventory of Nigerian property exceeds six trillion dollars. Nigerian property and housing market is dead capital because 80% of them have no title or bad title and therefore not good as collateral for bank loans. So creating the proper legal framework to make dead capital fungible (easily transferable) will create an instant credit market and enable Nigerians to borrow on their property. A Land Use Administration Act will introduce new rules to make the consent process more efficient and give confidence to banks to accept title documents as collateral. This process will create an instant credit market to drive the economy and will easily contribute at least 5% to GDP.
Government stimulus intervention
Because of Covid-19, the economy has taken a very big knock. It is the responsibility of government (like most western countries) to reboot the economy by supporting businesses with a business support fund of at least 50 trillion. We applaud the government for the injection of funds to support the economy. We note the following:
- Nigeria Economic Sustainability Plan (NESP), 12-month, 2.3 Trillion Naira ‘Transit’ Plan between the Economic Recovery and Growth Plan (ERGP) and the successor plan to the ERGP
- Ministry of Trade and Industry, MSME Survival Fund, The Guaranteed Off take Stimulus Scheme and the Credit Support to MSMEs and Priority Sector and
- Central Bank of Nigeria N10 billion loans and grants approved for various groups and organisations for pharmaceutical and healthcare-related research, under the COVID-19 intervention scheme.
- The Special Public Works programme expected to engage 774, 000 Nigerians to cushion the effect of COVID-19 pandemic.
It is a good start but not enough. The Government should look to ways and means by the CBN to inject at least 50 trillion into the economy. Government can intervene through a National Credit Guarantee Agency to support viable business proposals so they Business can easily access credit. Major economies of the world run on credit. The key is that the creditor is assured that he will be paid by government guarantee. Another key institution is the Development Bank (DBN). Nigeria has a Development Bank, but unfortunately undercapitalized. The DBN needs to be properly capitalized to boost the economy.
Enabling Business Environment
The factors listed above will not work without an enabling business environment. The first step is to have an efficient legal and regulatory system. For instance, the Nigerian judicature is based on the 1875 Judicature Act. The consequence is that cases take too long to resolve. It takes between 5 to 20 years to resolve simple contractual disputes. Investors, both local and international, will not invest in a country where simple contractual disputes take between 5 to 20 years to resolve. We must give urgency to this sector and reverse legal failure. A speed of justice policy will reduce delays. In this regard, the National Assembly must consider enacting the Administration of Civil Justice Bill to ensure efficient administration of civil disputes. Also, new methods of dispute resolution should be considered such as Alternative Dispute Resolutions, small claims courts, traditional and customary arbitration. Quasi-judicial administrative tribunals can be established for sectors, following the UK example. In England there are many administrative courts for Telecommunications, Taxation, Transportation, Insurance, Education, Financial Services, Trade, Investments, etc.
Finally, the Nigerian legal and regulatory framework must be reviewed and structured to create the enabling environment that can support the development of a digital economy. Enactment of the Company and Allied Matters Bill will be an important step to improve the business environment for entrepreneurship and to provide greater clarity for investment funds. Once enacted, it will be important to develop regulations to support the Companies and Allied Matters Bill and other relevant recently passed legislation, such as the Secured Transactions Act, to ensure effective implementation. Additionally, there should be a review of legislation impacting digital entrepreneurship including the following:
- The Intellectual Property Policy and Legislative framework
- Cybercrime Prevention Act
- The Venture Capital Incentive Act
The Tax incentives system akin to the pioneer tax system is needed to ensure that the regulatory environment is investment friendly rather than an impediment to the growth of the economy.
Discipline of Execution
Nigeria has a plethora of laws, regulations, guidelines and Executive Orders. The challenge is lack of implementation of these laws and regulations. Unless rules are enforced, Nigeria will not easily overcome recession. A vigorous government policy is needed to implement diversification, strong trade policy and access to credit etc. There needs to be timelines and harmonization of work of the various government agencies ministries. Nigeria can generate 10 million Jobs and over N100 trillion with full compliance with policy implementation. This will help to mitigate the impact of the impending recession. The President must take charge and ensure vigorous implementation.
The story about diversification of the economy is an old argument going back 30 years and in fact the Nigerian economy is actually diverse but the problem is lack of government consistency which has meant that although we have diversity, no revenue flows out. We can only succeed if the twin administrative tools of power of focus and discipline of execution are applied. This presentation is made from the point of view of a development lawyer. It is up to the economists to draw what they can to mitigate the impending recession.