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'Nigeria's economy 'll rebound in 2017' - The Nation
The International Finance Corporation (IFC) is the private sector arm of the World Bank Group. Its portfolio in Nigeria, which is in excess of $1.5 billion, cuts across the energy, manufacturing, healthcare and financial institutions sectors, among others. IFC's Country Manager in Nigeria, Eme Essien Lore, is optimistic about the future. By next year, she says, the country's economic environment would have stabilised; inflation brought to a moderate level; the financial sector reformed; the exchange rate stable and the trade regime liberalised. DANIEL ESSIET met her.
The economy is in recession. How do you react to this? What can Nigeria do?
I wouldn't say that I am surprised at this development. Though we can't say what really happened, it is not a surprise considering that we are experiencing the challenges of living in a mono economy. Nigeria is so reliant on one product. I think the big question for the government, development partners and the private sector is: how do we get ourselves out of this crisis? We should be concerned about how we make sure the economy doesn't drift too far into recession, and ensure that some of the sectors that can get us back onto growth path remain somehow viable. The first thing is to stabilise the economy.
How do we stabilise?
The fiscal deficit has to be addressed, as well as the foreign exchange (forex) regime to achieve some stability. We should also encourage greater inflows of capital and foreign investments that the country desperately needs. Shortly after, there should be a focus on diversifying the economy. The oil sector contributes approximately 10 per cent to real Gross Domestic Product (GDP). We have services, manufacturing, and agriculture. All these should play important roles in growing our GDP. So far, they are not faring well in terms of promoting export growth.
How do we ensure that we explore these sectors to contribute to economic growth in a way that diversification will come to play?
Right now, there is some rule of law being applied to reform the system to enhance economic performance. Nigeria has a low value added tax (VAT) regime- five percent- which we are not able to collect effectively. In West Africa, there are countries that have four to 10 percent VAT. The Minister of Finance said we recorded 20 per cent compliance rate in terms of VAT collection. Tax revenues are too low to finance the government's programme. In light of the growing demand for infrastructure, it appears that the government must make greater efforts to improve its tax collection performance.
There is an opportunity to look at where we can extract value within the economy without creating extra burdens on the people. At the same time, measures, such as achieving a lean and cost-effective government and fighting corruption remain as relevant as ever. This extraburden on the government's finances calls for close monitoring of the fiscal situation. I see that the government is doing a lot by eliminating ghost workers, trying to reform some of the revenue-generating Ministries, Department and Agencies (MDAs) to improve what they contribute into its coffers. Succeeding in raising revenues will help the authorities to meet their financial responsibilities, as well as to find the fiscal space to make productive investments and to address the needs of Nigerians. On the whole, we have to think about stabilising the economy in the short term. The reality is that we have to stabilise the economy. We begin with stabilisation first, then diversification. The diversification strategy should be closely linked to the short-term stabilisation goal.
While short-term macroeconomic stabilisation is important, a well-designed diversification strategy will pay attention to long-term development challenges. The government has to continue this without losing focus. The government must set up a lot of goals regarding diversification. The government should be committed to more economic diversification and choose the export-led model as a way of achieving its development objectives. The aim should be to diversify the production base, and to reduce the oil sector's importance in the economy. Accelerating economic diversification should be done with various policy instruments. The reality is that the oil price crisis is going to continue for a while. We are going to find ourselves in both high and low demand situations. We have to make sure we protect the economy from this violent cycle. Planned initiatives to increase non-oil revenues must be given high priority to help compensate for the fall in oil revenues.
If you were to recommend a diversification blueprint, what kind of features would be critical for implementation?
Diversifying may appear easy; but it is not just about diversifying; it is about extracting values from the sectors that are supposed to be contributing to the nation's GDP. For diversification to make impact, we have to look at the different sectors of the economy that is supposed to be contributing to growth. We have to look at each sector carefully and investigate what is the level of contribution that the sector is making to the economy.
We carefully figure out all the areas where we have comparative advantage and implement policies to help us capitalise on that competitive advantage. For example, Nigeria has competitive advantage in agriculture. Therefore, there is a need to tailor policies to provide strategic direction for agriculture to grow, boost long-term growth and competitiveness of the sector. Investment in agriculture means a competitive farm sector that can drive the economy. The investment will help leverage private sector resources, which are vital to ensuring prosperity and competitiveness of our agriculture sector. Diversification should be pursued with the provision of the necessary critical infrastructure to support agricultural development.
The shift of attention from the oil sector to the agricultural sector would, among other things, bring about a shift from monoculture economy. We should promote a competitive, sustainable, diverse and adaptable agricultural sector. It is not all about putting import restrictions across the sectors. That might not be the solution. It is really about taking careful import substitutions and promoting industrialisation. But it needs to be carried out within the stabilisation strategy. It has to be done carefully.
To stabilise, we need to introduce some sort of subsidy to support every aspect of the sector, particularly on the import side. This will encourage people to go into production. So, it is a planned approach. We have great ideas, but fall short during implementation. These things don't happen overnight .They could take five years, 10 years to achieve targets as planned.Things don't just happen overnight.
Despite the flexible exchange rate introduced by the Central Bank of Nigeria (CBN), the exchange rate is going high leaving the Naira in a deplorable condition. How do we address it?
The Central Bank of Nigeria (CBN) announced the change in its position from the fixed exchange rate regime to allow the exchange rate to float freely and to find its equilibrium. What they are trying to do is what they ought to have done. It was becoming evident that the previous currency arrangement, which held the naira at an official exchange rate and restricted access to foreign currency, was not helping to achieve an orderly adjustment to the trade shock the country experienced. It is difficult to achieve devaluation goals within an economy like Nigeria with the structural inefficiencies that we have. Any economist will tell you that when you devalue a currency in an economy like Nigeria that have a lot structural inefficiencies, that the challenges will not leave immediately. The truth is that it is a step that should have been taken earlier. We cannot deny the fact that this needed to be done. Investors view a fixed exchange rate regime as too inflexible. If the CBN doesn't allow the naira to drop enough, foreign investors will continue to shun our economy. Most investors would prefer a fully-floating naira. It may fuel inflation in the short term, but would make exports more competitive and encourage foreign investment. Certainly, the longer we waited to correct the situation, the longer it would take to correct it. So market forces have now taken over. The question to ask is for how long is that going to persist? We are put on the realm of speculations here.
It is unclear. It is really unclear. We are in for some difficult days ahead. How long it will persist is what nobody knows. But what we have in Nigeria is an incredible opportunity. The government has a high degree of integrity. Some good steps have been taken, like the removal of fuel subsidy. The government is trying to introduce some prudent measures into the system.
What is your economic outlook for the next three years?
We do think that the economy will recover in 2017 for a couple of reasons. First of all, oil price may eventually stabilise. Since oil price is going to stabilise at a certain level, I think that will lead to the recovery of the economy. We hope to see the reform agenda take root. A lot of initiatives that the government has taken today are measures that take a long time for the impact to be felt. There is going to be inflation and pressure on purchasing power. It is going to be difficult to purchase even basic food items. The budget will prompt capital spending and that will boost growth. There may not be massive difference, but 2017 will be better than 2016.
What will that be for Nigerians?
For the ordinary citizens, I don't think there will be much difference. Inflation will drive them to choose what to eat from the consumption basket because of limited purchasing power. I don't think the average Nigerian is going to see a difference in real terms. It may be in the next two years that we begin to get ourselves out of that cycle. There is pressure on the economy and it is going to take time for Nigerians to see the difference. We have a great leadership with penchant to tackle corruption. We have never had this before.