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How Nigerian Government Caused Economic Recession

AFRIINVEST
Posted: Sep 5, 2016 at 7:23 pm   /   by   /   comments (0)

 

By Muhammad Sanusi II

I will start by going back to the past, not just Nigeria, but Africa. Let’s ask ourselves what were the key drivers of growth in Africa, and what has changed since this golden decade Africa had.

Africa Golden Decade was basically the decade of the 2000s. This rise in Africa across the world was one of stories of sadness, poverty, famine and hunger to a continent that was full of potentials; where there were opportunities for investments; where capital markets were booming.

All of a sudden people heard countries like Nigeria, Kenya, Ethiopia, Ghana, etc., when previously these were supposed to be a basket case in the world. The first pillar of this growth was clearly shifting terms of trade, which, as we all know in developing economics, can be a mirage.By 2008, one barrel of oil would buy you one Sanyo flip telephone as against 19 barrels of oil to buy the same phone earlier. That gives an idea how well the terms of trade have shifted.

We had an oil price of $10 a barrel in the time of Babangida. At one point under Obasanjo, it rose to $140 a barrel. This was a time of rapidly improving technology, cheaper manufactured products and, therefore, our oil could technically import much more. This process was not common across all of Africa, because we are aware of other African economies that grew, and, certainly, it was not just one pillar.

 

Let’s go to the second pillar of growth in Africa in that decade, which was debt. Between 2002 and 2008, what was the level of debt to GDP (gross domestic product) in African countries and what they became after the Paris Club, HIPC debt reliefs and so on? Nigeria was at 50 per cent debt to GDP and came down to literally 5 per cent or so.

This happened across all Africa in the form of debt forgiveness, debt relief, debt restructuring and so on. What this did was that it freed up government balance sheets and in that decade of Africa rising, the countries went back on a borrowing binge.

 

Nigeria kept borrowing, not externally, but internally. I think our external debt was just about $8 billion on the balance sheet. But, on the Naira indebtedness of the Nigerian government, we were spending over 30 per cent (maybe 40 per cent now) of every Naira earned just servicing debts.

Where did all these debts go? Did it go to roads, power, refineries, or infrastructure? No. The new borrowings were simply recycled into much higher recurrent expenditures. What that did was that it helped sustain a consumption boom; and GDP was growing, largely driven by consumption spending.

In 2010, the government increased minimum wage to N18,000. I was at the Central Bank, I protested and protested. They had an election coming, they increased the minimum wage N18,000 and basically borrowed money to pay. In 2012, as governor of Central Bank, I said this was an unsustainable wage bill. We needed to reduce the size of the public service.

The problem is that there is nothing that we are facing today that we did not know would happen. That is the truth. We made mistakes. Many of them deliberate. We ignored every single word that pointed otherwise. And not so that we are not always blaming the previous administration, we have also made mistakes in this administration.

We have started retracing our steps. And we must not fall into the same hole that we fell into the last time, where the government is always right. If a policy is wrong, it is wrong. Nothing will make it right. And it has to be changed.

We have very many people in Nigeria who you think are very rich, but who are really bankrupt, because everything about them are being financed by bank debts. When one debt matures, they have enough connections to call another bank, borrow and refinance that debt. They are not earning anything. They have private jets. They have yachts. Their families travel first class. They go abroad and stay in the most expensive hotels. This is what is happening today. What do you think of those people? When you think about such people, do you think they are foolish people? Or do you think they are wise people? So, what would you say of a country that does this?

Growth does not come by borrowing money, pay salaries, people spend money on pure consumption spending and nothing is produced. It’s fine in the short term. But, it is not sustainable. How much can you continue to borrow and consume without producing?

Today, we are in a new reality. This is what they call the new normal in Africa. And we have a two speed Africa. If we look at the new IMF World outlook, you will see something interesting. Non-commodity Africa will be the fastest growing part of the world, even higher than emerging Asia, whereas commodities Africa (countries like Nigeria and Angola) are among the lowest growing parts of the world, at the rate of Europe and Latin America. And we can’t explain why.

Every single thing we are talking about today about what we need to do have been said before. I have a document “Industrialisation Potentials of Northern Nigeria under Ahmadu Bello, 1962.” There is nothing we are saying today that was not part of the industrial plan of Northern Nigeria in 1962.

Do we really love our country? Do we feel any shame when we say that Malaysia that came and took palm seeds from us is now exporting palm oil?  Palm oil is what Eastern Nigeria people eat. Now, we can’t produce it. Vegetable oil, groundnut oil.

Again, we can always talk about the policies of previous administrations. We talk about oil subsidies that brought oil billionaires. But, we have also created our own billionaires since 2015 from foreign exchange subsidies. When the CBN was selling dollars at N197 and people were buying at N300, if I sit in my garden and make calls on the phone, I will have enough people to call in the industry to get me $10 million at official rate. Do you doubt it?

If this government continues to behave the way the last government behaved, we will end up where Jonathan ended. You don’t need to be an economist to know that any system that allows you to sit in your garden and with a telephone call make N1 billion without investing a kobo, that system is wrong.It is unsustainable, no matter how positive you think about it.

So what’s the summary? The years of Africa rising where one child could lift us up are behind us. Sustainable inclusive growth now depends on investment. Please every planning commissioner should remember that its investment.

The role government can play is now by getting appropriate market growth, and we said that you don’t have enough money. You have seen how much money you are raising per head. It is not much. Even if you move money from recurrent to capital expenditure, if the pull does not increase, it is not much. So, the government doesn’t have the pocket to do. If you got to look for private investments, local and foreign, to to do that, and you do that by having a corporate micro-policy and the government is getting it right, finally, and also creating a supportive business environment.

So, set excess rate to intensify it flows, eliminate subsidies that has been done. Now, address failures in the power sector value chain, starting with the DISCOs, digitize state, land registries, prioritise public spending towards investment and protect infant industries.

Anybody who tells you not to protect your industries is deceiving you. Create a level playing field between the infant industries and the big ones. I am not saying go and protect everything, but they must be a way of ensuring through power, infrastructure, industrial plasters, research and technology, technical and vocational education and through appropriate trade and  tariff policies that critical policies are incubated before they are allowed to go out on the streets.