We welcomed year 2020 with enthusiasm after a “detty” December with brand new, “chasis”, resolutions, back slapping, rejuvenated gusto and hope. Hope for a new beginning, hope for a better tomorrow, hope for another chance to make right those things that weren’t so right in our lives. Hope, while thankful for life.
This hope had promise despite the age long challenges we faced as a nation. The security challenges which manifested as either Boko Haram, cattle rustlers or herds’ men in the North, kidnappers or armed robbers in the South. Tottering economy that was on its way to the emergency unit with a suspicion it might end up in ICU and the largely dysfunctional system we have come to probably accept as our fate.
Little did we know that the baseball bat of a new Corona Virus, infamously named COVID-19, was about to hit Nigeria and indeed the world in the back of the head. The contact with our heads knocked us out and we are yet to know the true extent of internal and external damages done on the world, there’s probably internal bleeding, our world has probably changed, irreparably, and we are just beginning to catch a glimpse of the new ramifications.
For instance, who would have been crazy enough to think or suggest that crude oil could one day trade at a negative price? Inundation of storage facilities yeah, yeah, but what does that even mean? Who would have thought that 30 million Americans would become unemployed just weeks after the Dow Jones, New York Stock Exchange (NYSE) index was trading at record highs at the summit of the longest bull run in American history? Who would have predicted that working from home would become the new normal and everyday would someday feel like every other day? Who could have predicted that the capitals of the world would shutdown from Los Angeles to Lagos, from Cape to Cairo? Lives matter and must be saved at any cost. Undoubtably so!
This virus is showing no sign of abating, infection rates are going up, previously infected and cured people are becoming re-infected and many countries are yet to “peak”. The conundrum remains whether to continue or ease the lockdowns? What if there’s a second wave? What if the mortality surges? What if the second wave is deadlier than the first? What if? What if? What if? Tough time to be a world leader you’ll probably agree?
But livelihoods matter too. The balancing act between saving lives and sustaining or resuscitating livelihoods is a new skill that must be learned by governments all over the world.
We are just beginning to understand the magnitude of the effects of the Corona Virus induced lockdowns. It started with furloughs, shut-ins, shutdowns and we are beginning to see layoffs. The truth is that companies have little options. Where would demand and sales come from? Without sales there’s no income, without income companies cannot afford bills and by extension, can’t afford payrolls.
As the world reopens in phases, we would begin to understand how bad things have become. Employees would get to their offices and security men would deny them entry or they try to log into the network and the computer would prompt them to see HR. You know?
Banks may call facilities and at best review terms. Disposable incomes, which have gone down would stay down and aggregate demand would vaporize. So, out goes our world as we know it. This is going to have a ripple or, if you prefer, a domino effect. It would be about subsistence going forward, the basics, food and shelter, staying alive, weathering the coming storm.
With demand for non-essentials going down, small and medium scale enterprises would struggle, large corporates would struggle even more. Hotel rooms would stay empty, airplane seats as well. Less petroleum required, less energy in general. Lower disposable income, lower aggregate demand, lower corporate income and spending, layoffs, bankruptcies, non-performing loans sky rockets, bank failures, debt defaults? God forbid. Really?
In Nigeria, the aftershocks of the Corona Virus pandemic are going to be staggering because we already had various economic issues we were grappling with. Falling external reserves, mono-product economy, abysmal debt-service ratios, ridiculously high recurrent to capital expenditure ratios, miniscule tax to GDP ratio of about 5.7%, one of the lowest in Africa, huge budget deficits, disharmony between monetary and fiscal policies if any at all, decayed or absent infrastructure, endemic corruption and more. Utter despondency.
To make our case particularly disconcerting, we rely mainly on crude oil receipts and this accounts for about 70% of government revenue and 90% foreign exchange earnings. With our cost of production touted to be above $30 per barrel and the price of crude oil not expected to rise above $35 throughout 2020 even with the expected cuts in production by OPEC+, we are in for some major turbulence. Brace yourselves folks.
Baring a miracle, due to the reduced forex earnings and continued importation, our external reserves would continue to dwindle, this may result in the exchange rate of the Naira rising astronomically (above N600/$ is easily within striking distance, could be much worse), the CBN might struggle to meet its forex forward obligations, inflation breaks the 20% band, unemployment hits and exceeds 30% with the looming layoffs due to downsizing, governments drastically reduce spending, companies also, non-performing loans increases, resulting in bank failures, federal, state and local governments owing salaries for several months. Na wah o.
All these might just lead to social unrest as it’s being witnessed in Lebanon and was witnessed in Venezuela. Just that the case of Nigeria might make what happened in these other places seems like child’s play. The prognosis is indeed dire.
Thankfully, it is not all doom and gloom as, with some serious strategic thinking, planning and efficient execution, Armageddon might be averted.
I have been pondering on what Nigeria can do to come out of this, though bruised as it is unavoidable, with an economy that is better and stronger. I’ve got a few ideas and I lay them out below:
1. We must stop voodoo economics including any form of currency restrictions, embrace and champion the African Continental Free Trade Agreement, open the borders, further make it easier to do business in Nigeria, crush impunity and corruption. The rule of law must become supreme.
2. Harmonize the fiscal and monetary policies and ensure economic actors, particularly the regulators and economic managers sing from the same hymn sheet. The targets should be to reduce unemployment, stabilize the exchange rate, reduce inflation and interest rates to single digits over the next 18 to 24 months and ultimately spur economic growth. If we are able to tackle the exchange rate problem, many of these other problems would be resolved because inflation in Nigeria is largely driven by the exchange rate and interest rate is linked to inflation. Some ideas on exchange rate management are laid out in point 7 below.
3. The economy has to be diversified. We need to develop other sectors of our economy and priority should be given to initiatives that earn forex, have the ability to start earning forex within a 6 to 12 months period and generate a lot of employment. I have identified 4 potentially interesting sectors that ticks all these boxes:
a. Tourism: Firstly, Nigerians should be encouraged and supported to set up tourism focused ventures from theme parks and hotels to organized tours to wild life reserves and festivals, visits to exotic destinations, restaurants, arcades, beaches and many more. Nigeria has hundreds of potentially viable tourist sites and locations. The Federal Ministry of Culture and Tourism should be mandated to come up with a roadmap in partnership with the Ministries of Trade and Investments and the Ministry of Finance immediately. Just one hotel with 80 rooms requires about 120 staff, a theme park on 6 hectares would require 200 staff, while a small bus tour company would require up to 30 staff. Nigerians should then be encouraged to holiday at home and the relevant MDAs should market Nigerian tourism to the world. “Nigeria, Land of Wonders”.
b. Mining: This sector should be cleaned up. Illegal mining should be crushed. The sector should be made attractive and extra incentives provided by the government. The Abuja Commodities Exchange (ACE) should be restructured and adequately capitalized. The roles of ACE should include acting as the primary counterparty to every trade, organize the sector and work with the Federal Ministry of Solid Minerals come up with a roadmap within the next 6 months.
c. Agriculture: For a start, we must feed ourselves, then we must identify crops in which we have or can have comparative advantage. The Central Bank is already thinking in the right direction but its efforts must be supported by the fiscal side. The Tuns Farms in Osun State has a capacity to process 30,000 birds daily. You would need at least 100 poultry farms with a capacity of 30,000 birds each to feed that facility. Each poultry would have about 70 to 100 staff. Just imagine the employment generating capacity of that facility alone. Now think of the supporting ecosystem of packaging companies, livestock feed producers, transportation companies etc. Think of the income that can be generated, think about our GDP, think about jobs. Let me now land the plane, a 30,000-bird facility cannot serve 2 million people. Meaning we probably need 100 of such facilities in Nigeria and that is only poultry. The possibilities are endless, earn income in Naira and forex, create jobs, increase GDP, increase government revenues. Need I say more?
d. Manufacturing: We need to make what we consume from household items, to clothes, cars, building materials, petroleum products etc. The reasons and effect of this is similar to what we’ve discussed above.
e. Education and health: For a start, all civil servants, elected and appointed public officials must be precluded from procuring health services abroad while in service and their children must school in Nigeria. Furthermore, a state of emergency should be declared on the health and education sectors. Private sector players should be encouraged and incentivized to invest in these sectors as well. The result is that we would have improvement in these sectors, save forex, possibly earn forex, create jobs and improve lives of Nigerians.
4. Build infrastructure like our existence depends on it. It does. Particular emphasis should be placed on:
a. Broadband affordability, availability, quality and penetration. This must be private sector driven.
b. Industrial parks should be built and the government should not build but be an enabler and facilitator with incentives and giving guarantees to investors.
c. Power: For a start, a state of emergency should be declared on this sector and Office of the Vice President given the mandate to sort things out and put the sector on a firm growth footing within the next 12 months. The Transmission company should be unbundled and privatized and a stakeholder “CONFAB” conveyed immediately to dialogue, proffer solutions and agree on a path forward.
d. Transportation: We need to rethink our national transportation strategy and come up with a new masterplan. We need to be able to move people and materials around Nigeria seamlessly. In addition to revamping existing roads, we must build new ones, diversify and have an integrated transportation system to include rail, water and air. For instance, we need to dredge the Niger to allow for certain container vessels to reach a container port to be built in Niger State or Lokoja.
5. Cut waste. Items like pilgrimages, bloated estacodes, useless overseas trainings, presidential jets, kilometer long convoys of government officials (elected and appointed) etc must go. We must reduce the size of government and this should start from a biometric staff audit of civil servants nationwide.
6. Deregulate the petroleum industry, stop all subsidies, in fact and indeed and this must include “under-recoveries”. The Petroleum Industry Bill must be passed this year and implementation must be efficient. Lastly, the rot in the petroleum sector including the inexplicably high cost of crude production in Nigeria, under reporting of crude sales and crude oil theft must be stamped out.
7. Tackle exchange rate:
a. The drivers of the supply of forex are the sale of crude oil, exportation of raw materials, exportation of finished goods, remittances, loans and grants. We need to identify the various items that generate revenue and put policies in place to ensure the maximization of forex earnings. One good strategy is value addition. Instead of exporting raw materials, we should export finished or semi-finished good thereby extracting more value and higher income.
b. Forex demand drivers are mainly consumption linked. Importation of refined petroleum products, cars, planes, trains, marine vessels, clothes, food, building materials, household appliances, drugs, wines, other exotics beverages, military equipment and arms/ammunition and many more. We need to start producing what we consume and we can start with some easy to produce items (quick wins) and then ramp up capacity. This is a good place to deploy tariffs and quotas to encourage local industries.
c. The CBN must ensure the convergence of exchange rates. Period. Arbitrageous profits in the forex market is unholy and killing our economy. This has to stop and only a convergence of rates can kill this monster.
d. CBN should stop selling forex directly to any individual or institution instead, work with the Nigerian Stock Exchange, NASD and FMDQ to create a robust platform for the trading of foreign currencies such that all banks, BDCs registered with the CBN, stockbrokers and fund managers would be participants in a newly created market and all participants would have online, real-time, 24 hour trading access. We would end up having up to 10,000 participants on this platform, there would be robust price discovery, everyone that needs forex should approach a trader that would transact on their behalf on the platform and the CBN would then supply and purchase forex or Naira as it deems fit to maintain price stability or desired objectives. Pragmatic.
8. Increase the tax net and tax revenues to government. Taxes create a social contract between the government and the governed. The various governments we’ve had in Nigeria have been able to get away with mismanagement, incompetence and misappropriation of funds because they have not really been spending the “peoples’ money” that might have been generated by way of taxes. The Nigerian tax to GDP ratio is very low at 5.7% at the end of 2017. The ratio for Seychelles is 31.2% and the median tax to GDP ratio on the African continent is 17.2.%. (according to an OECD survey https://www.oecd.org/countries/nigeria/revenue-statistics-africa-nigeria.pdf). If the Nigerian tax to GDP ratio doubles to about 11% and even if our GDP stays at $450 billion, using an exchange rate of N380/$, the tax revenue of government should be closer to N19 billion or more yearly.
That is double our current national budget. And we can even do better. The Joint Tax Board and the Federal Inland Revenue Service can really start to make moves to achieve this goal by deploying the following tools:
b. Encouragement and incentivization
c. Enforcement of tax laws
d. Accountability regarding taxes collected
9. Improve security. Without safety of lives and properties, commerce dies and the economy suffers. The insurgency in the North East has to be crushed. We now know this is possible. The Cattle rustling in the North West and herdsmen menace Middle Belt also. Armed robbery and kidnapping should be tackled frontally. Unfortunately, the armed forces are stretched thin, demotivated, understaffed, underpaid, unmotivated, ill-equipped and, sometimes, unappreciated. This has to change and fast.
The health challenges occasioned by the new virus, COVID-19, shall pass. It’s either a cure would be found, a vaccine would be developed, there would be herd immunity or it would decimate the global population like the 1918 Spanish flu, but it shall pass. However, the resultant economic devastation would reverberate much more resoundingly. How well Nigeria fares would depend on choices we make at the governmental, corporate or family levels and we can either come out of this stronger or dust ourselves up and just trudge along as usual or we allow this consume us.
I’ve been able to put my thoughts on paper and lay out a few suggestions on how I think we can make the best of the situation and restructure our economy. It is hoped that this adds to the conversation as we continue our quest in search of Eldorado.
Abiodun Akintaju is a Lagos based investment banker and a concerned Nigerian.