Nigeria’s economy gasps for breath

Clement Oriloye

On paper, the country’s economy is growing at the rate of over 7 per cent. But the living standards of the people offer no proof of that. The average Nigerian, lacking access to the most basic of needs, has become the epitome of poverty.

Dr. Ngozi Okonjo-Iweala, Minister of Finance and Coordinating Minister for the Economy, said most of the growth took place in the non-oil sectors of the economy. “With a Gross Domestic Product, GDP, growth rate of over 7 per cent and foreign exchange reserves of over $40bn now, the economy has been doing well. Under the Olusegun Obasanjo administration, the foreign reserves, at a point exceeded $60bn. But this was depleted by the two administrations that have succeeded it. Professor Pat Utomi of the Centre for Values in Leadership, said: “It’s the fault of government, starting with the late President Umaru Musa Yar’Adua. Whatever you say of Obasanjo, at least he managed to achieve that discipline and they have frittered everything away. It’s not right.”

But Okonjo-Iweala has always harped on the need to diversify the economy. She reasoned that the $3.6bn in the depleted Excess Crude Account would not be enough for the diversification. For this reason, she has been working on the proposed Sovereign Wealth Fund, SWF, which is expected to replace the Excess Crude Account.

Even then, the government appears to have realised that its claim to growth of the economy is not as sturdy as it has been made out. A statement issued by the Central Bank of Nigeria, CBN, indicated that Nigeria’s economic growth is at great risk. According to a report issued by the National Bureau of Statistics, NBS, the country’s GDP dropped to 6.28 per cent at the end of second quarter (first half) of this year.

Utomi believes Nigeria can achieve major growth if the problem of leadership is addressed. “If we have the kind of people who are spending money the way they are spending it in the National Assembly and in the state legislatures, we will be in serious trouble with the economy. Any economy with those kinds of people will be in serious trouble, he said.

Utomi, who was one of three men that did a study sponsored by the Department for International Development, DFID on the country’s political economy, said the biggest challenge to economic growth is the disconnect between the people and their leaders.

“The leaders have no feelings for the people; they are completely detached. They are not motivated by fear of losing the next election. Despite it all, Nigeria is heading for a major boom. All we need are a few sensible people in vital positions,” Utomi submitted.

The increasing rate of unemployment in Nigeria has reached a worrisome stage. The official rate released by the NBS puts it at about 24 per cent. It is believed that this rate is not reliable, as many unemployed Nigerians are yet to register with the government.

Professor Akpan Ekpo, Director-General, West African Institute for Financial and Economic Management, WAIFEM, observed that the rate of unemployment in 2011 was 23.9 per cent, while the poverty incidence was almost 70 per cent. According to the economist, the situation appears to have deteriorated because 11 per cent of those with doctorate degrees could not find employment. Ekpo said despite the healthy growth of the economy in the last five years, unemployment has been rising alongside the increased incidence of poverty. In 2007, eight million Nigerians were unemployed. The figure rose to 10 million in 2008 and hit 18 million in 2011.

Ekpo opined that the very high rate of unemployment indicates the magnitude of the output loss to the Nigerian economy. He opined that it is clear that the economy is producing well below full employment output.

“When the high rate of unemployment is added to the rate of inflation, the discomfort index (misery index) is about 37 per cent, which is quite high for an economy with enormous human, material and natural resources. Many of the unemployed are educated, thus further worsening the misery index. And since to be unemployed for a long period of time affects the psyche of the individual, it threatens the family system and exposes the bankruptcy of the economic policies enunciated by technocrats, bureaucrats and other policy makers,” Ekpo noted.
The economist is worried that every year, the admission of new entrants into the labour market further increases the unemployment rate in the country. The professor stated that armed robbery, kidnapping, gangsterism and other vices are not unrelated to the high rates of unemployment in the country and across the states.

“No country can afford to have millions of unemployed youths. This army of the unemployed can become a ‘nuisance’ to society. It is a time bomb that must be diffused. It is sad and disheartening to see sound graduates of engineering, physics mathematics being unemployed for about eight years after graduation from even our first generation universities or to see them selling recharge cards. This type of disguised unemployment is not healthy for the economy,” he added.

The solutions to these problems, said Ekpo, is for the government at all levels to embark on massive residential housing schemes for all segments of the society, empower trainees in the various entrepreneurship centres to set up own small businesses and provide proper guidance to ensure survival of such enterprises, create stop-gap public sector jobs like cleaning of roads, maintenance of government buildings and other government physical assets.

Ekpo wants the government to provide teaching skills for graduates to become primary/secondary school teachers, with enhanced salaries as incentives and recruit graduates into various security agencies.

The country’s macro-economic stability has been questioned by experts, who have faulted the Central Bank of Nigeria’s monetary policy. The apex bank has admitted that monetary policy on its own has limitations with respect to inducing growth without fiscal and structural measures relating to petroleum, power and infrastructure sectors.

Efforts by the bank to keep inflation rate at a single digit have not yielded result.

In actuality, the prices of food items are on a steady rise. For instance, the cost of a big De Rica measure of beans (Oloyin), which sold cost for between N170 to N180 now goes for between N250 to N300. A small bulb of onion sells for N100 as against N10. Prices of other food items have gone up. The rise in prices is expected to continue, as food supply has been affected by flooding that has destroyed farm products in the agricultural states of Benue, Taraba, Niger and Kogi among others.

Determined to bring down inflation rate, the CBN has kept the Monetary Policy Rate, MPR, at 12 per cent since last year. Another worrisome issue has to do with the pressure on the naira. CBN had a policy of keeping the exchange rate at N150 to the dollar, plus or minus three. Over the past three years, the CBN has been defending the naira. Two years ago, the International Monetary Fund, IMF, called on the CBN to devalue the naira. But the CBN did not agree with the policy. “We are now compelled to look back and think about this issue of defending the naira. You cannot defend the naira if you have a limited external reserve capacity. Today, the naira exchanges for between N157 and N158 to the dollar. There is also speculation because the demand is not real. Some people, especially those who have looted the Nigerian treasury, just want to keep their money offshore.

The implication is a sharp rise in the cost of goods and services. Another factor responsible for the inflationary trend is the partial removal of oil subsidy at the beginning of this year. Okonjo-Iweala noted that fuel subsidy removal is a very emotional issue in Nigeria and that the Nigerian people had a trust deficit because of the historical misuse of resources.

The policy generated serious heat, typified by one-week nationwide strike, an action that cost the country over N500bn in revenue. As it turned out, the oil subsidy regime was the teat on which petroleum marketers were sucking. The government’s attempt to block the drain through which the subsidy payments were leaking has provoked oil marketers into causing artificial scarcity. Government continues to insist that fuel subsidy will deliver the much needed infrastructure.

At a recent roundtable, Olubunmi Asaolu of FBN Capital told journalists that decline in oil production, recent weakness in oil prices and increasing demand for imports combined to create a perfect storm. Also at the event, Mr. Wale Abe, Executive Secretary, Financial Market Dealers Association of Nigeria, explained that inflation in the first half of the year was driven partly by the impact of the partial deregulation of the downstream oil sector and some structural bottlenecks. He argued that in the 2012 Budget, government assumed oil price at $72 per barrel, while oil production stood at 2.48million per barrel just as oil revenue projection was put at N1.94tr. But the average price of oil during the 2012 Half Year average stood at $96.

Also at the event, Mr. Bade Ajidahun Oludahin, Currency Analyst Consultant, Forex Time Trading West Africa, listed the challenges of foreign exchange trading as increase in the sale of forex, removal of limit of dollars sold to Bureaux D’ change and target audit of the authorised dealers to check speculative trading.
On the country’s exports, Mr. David Adulugba of the Nigerian Export Promotion Council said the country exported non-oil products valued at $1.35bn in the first half of this year as against $1.50bn recorded in the same period last year. This represents a 10 per cent decline. The decline was attributed to unrecorded exports, the fuel crisis and strike in January.

The real sector has no good story to tell as it grapples with high rate of interest for loan obtained from Deposit Money Banks. Officially, the rate is not supposed to cross the 16 per cent mark, but it goes as high as 30 per cent. This has caused many manufacturing outfits to close shop.

No organisation captures the sorry state like the Nigerian Association of Chambers of Commerce, Industry Mines and Agriculture, NACCIMA. A statement issued by the chambers a fortnight ago revealed that over 800 companies closed shop between 2009 and 2011, taking with them thousands of jobs. Those still operating have capacity utilisation that fluctuates. More than half of them have been classified as ailing.

To add to the woes, the MasterCard Worldwide index of consumer confidence, which stood at 96.4 points by the second half of 2011, dropped to 91.4 points in the recently released set of results. This development has negative impact on the nation’s economy. For instance, the expansion of telecom facilities in the country, which had raised the volume of Foreign Direct Investment, FDI, from $18bn in 2009 to $25bn this year, could drop following attacks on telecoms facilities by terrorists in northern Nigeria.

Analysts reason that this action could discourage foreign investors from doing business in Nigeria.

Even while the actual total loss to the attacks is yet to be computed, Dr. Obadiah Mailafia, former Deputy Governor, CBN, believes it will cost about N4bn to replace the telecoms masts. Having invested about N2.6trn in the sector, Mailafia reckons that Nigeria will lose foreign direct investments. Through frequency spectrum sales, the federal government has made N300bn from telecoms firms, enabling it to plough revenues earned from the sector back into the provision of development infrastructure. The sector’s new challenge is a huge one.

In fact, global business leaders have identified infrastructure challenge as the biggest problem of the Nigerian economy.
At the capital market, the bulls are beginning to return to, with the All Share Index, ASI, crossing the 25,000 basis points mark just as market capitalisation has grown beyond N8tn. This is still way behind the over N13tn it reached in March 2008. Foreign investors account for over 70 percent of the daily market transactions. But retail investors’ apathy to the market persists.

Mr. Oscar Onyema, Managing Director, Chief Executive Officer of the Nigerian Stock Exchange, NSE, attributed local investors’ apathy to the losses they suffered in 2009 and reforms in the banking sector.

Also stifling growth is high cost of doing business in Nigeria. “The manufacturing industry as a whole operates on more than 70 percent of energy it generates, using generators and operating these generators greatly increases the cost of manufacturing goods,” remarked Dr. Herbert Ajayi, President of NACCIMA.

As shown by the 2012 Doing Business Data, of the 183 economies sampled, Nigeria is ranked 133rd, maintaining the same ranking as that of 2011, an indication that no significant improvement has taken place between last year and this year. The World Bank Investment Climate Assessment Report for the 2011 fiscal period also indicates that the Nigerian business environment despite the ongoing reforms, remain hostile. According to the report, investors were losing 10 per cent of their revenue as a result of the hostile investment climate, poor quality infrastructure, crime, insecurity and corruption.

Another worrisome development is the piling of both domestic and external debts. While Okonjo-Iweala believes that the external debt of N919bn ($5.9bn by March this year) is acceptable, she is not comfortable with the growing domestic debt, which stood at N5.96tn ($38.3bn) by the end of March.

Published in TheNEWS edition of 8 October, 2012