By: Udeme Clement
Akpan Ekpo, a professor of Economics, is the Director General, West African Institute for Financial and Economic Management (WAIFEM). He speaks on issues in 2016 budget, the need for the Federal Government to prevent currency crisis in Nigeria, the decline in Nigeria’s foreign trade by N2.5trillion and depreciation of the naira.
What is your comment on issues in the N6trillion 2016 budget presented by President Muhammadu Buhari to the National Assembly?
In the 2016 budget, the deficit GDP ratio is within acceptable range. Normally, it should be around 4 or 5 percent, but in the current budget, it is over 2 percent. The problem is not the ratio. The point is, what component is for capital expenditure? You can increase your deficit GDP ratio, but if the money is used for capital projects like infrastructure, there is no problem. We have evidence of China and other countries that exceeded the bench mark for deficit GDP ratio, but have viable economies, because they used it for capital projects. So, people should not worry about the deficit, if it is utilised for viable projects. To me, if they increase it slightly to 4 or 5 percent and use it for infrastructure, it will help our economy.
In the budget 2016, government wants to borrow more money. How long are we going to accumulate debts?
If government has to borrow, it should be to finance capital projects and not recurrent expenditure. The budget itself is about N6trillion and they will borrow about N900billion from external and domestic sources to fill that deficit. The issue is not about borrowing, but borrowing wisely, and whether we can pay the debts. Over the years, we have been borrowing. For instance, the last government used a lot of borrowed funds to finance recurrent expenditure in the budget, which was totally wrong. We hope this government will not follow the same path. We must not say because debt – GDP ratio is about 14 percent, within acceptable benchmark, that we have space, so we continue to borrow.
The fact is that GDP does not pay debts. What pays debts is revenue. So, the interest should be, what is the debt – revenue ratio and not debt – GDP ratio. This is where the problem comes. Revenue pays debts and your revenue is estimated; if for some reasons your revenue declines sharply, you can’t pay the debts. In 2016 budget, N1.47trillion is allocated for debt servicing, which is quite high. You can’t blame this government for that, because governance is continuous; whatever the previous government committed itself into, the current government must fulfil that obligation. Going forward, allocation for debt servicing should reduce, and we must look at revenue before we borrow, and not GDP.
You said if the revenue is estimated, and once it declines sharply, government cannot pay debt. Do you see that happening to Nigeria, especially with the declining oil Prices?
Well, nobody knows, but it can happen because our economy depends on oil and oil revenue has declined sharply. That is why we are facing this problem. What if by tomorrow the oil price is close to zero, what do we do? Therefore, we must have a more realistic forecast of revenue to drive the economy. We must not keep on borrowing because we have space.
Let me give this government credit, because since 1972, this is the first time the projected oil revenue in the budget is less than non-oil revenue, meaning, revenue from other sources aside from oil. We have been depending on oil revenue for years, but for the first time, oil revenue is taking a second position. They are expecting about N800billion from oil and over N1trillion from non-oil, which is the best way to go. These non-oil sources include company tax, surpluses from government agencies like Central Bank of Nigeria (CBN), Customs, and Nigerian Ports Authority (NPA) among others. Previously, it was oil revenue that dominated the budget, but the negative shock in the decline of oil revenue makes government to start thinking differently, and they should continue in this path, even if in future oil price goes up. It is common sense that oil is non-renewable resource because it will finish one day. It is called a wasting asset. How can you plan entire economy with a revenue source you have no control over the price or the out put? This is a good step that government is taking, and I believe in future, they will demystify the oil sector.
Considering the fluctuating oil price, is the oil bench mark of $38 per barrel realistic in 2016 budget?
It is not a matter of being realistic, but government has taken a position and they are being pessimistic, which to me is good, because they cannot go zero. I hope that $38 they arrived at was based on good forecasting, on consistent macro-economic framework and macro-econometric model. I am only impressed because for the first time as I said earlier, oil revenue projection has taken a second position in our budget, which is a good development.
The exchange rate now is over N270 per dollar, even as depreciation of naira is having a telling effect on the economy. What can government do to address the situation?
Let us get it clear, because what we have now is depreciation and not deliberate intervention by the CBN, which is devaluation, but the impact is the same. The naira is depreciating because we are not producing anything for export. What we export is crude oil and not manufactured goods and services. Nigeria is still import dependent. So, the scarce forex is being used to import goods and services. The way we can turn it around, is to change the structure of our economy and produce goods for export. Government must put infrastructure in place and give people incentives to produce, if not, our currency will continue to depreciate. Our source of forex is crude oil, and the oil is not doing well. So, the demand for forex now outstrips supply, which is the problem we are facing. CBN is trying to manage it, but as they are managing it, the only source they can get to increase the forex is oil, and the price is declining. Let us pray that we don’t get into currency crisis.
What CBN is doing now is called a ‘Managed Float’ with more weight on the float aspect. Whenever the naira gyrates, it is the float that is playing the trick. That is why you see the naira today N240 and tomorrow N250, it is reacting to the float component of the market. The dollar belongs to US and they way they react is not the same way Nigeria reacts. So, it is not as easy as people are saying. Also, another managed component, which is outside pure economics means your currency must reflect your sovereignty as a nation, and you have to defend it.
Can you give us more insight into what currency crisis means?
Currency crisis is a situation where the CBN can no longer honour its commitments, such as letters of credit, debt instruments, when Treasury bill is due and they can’t pay.
What is the economic implication of currency crisis?
It means the economy is bankrupt. The CBN’s part is the monetary aspect while the budget is the fiscal policy. At a point, there should be coordination between monetary and fiscal policies. The way the economy is now, the Minister of Finance and the Governor of CBN must meet regularly to coordinate and work on the same page, because the economy is not on a normal growth path.
Unemployment is part of the problems and the way government is tackling it has challenges also. When unemployment is a crisis like what we have now, at 28 percent when combined with under-employment, the private sector cannot solve the problem. Only public sector can provide short-run solution. The President in presenting the budget practically alluded to that phenomenon without extension. For example, he said, the federal would collaborate with states and local governments to employ 500.000 teachers, which is a large number they want to take out of unemployment. Imagine the same government employing large number of people in Police, Customs, Immigration, Federal Road Safety, Army and Navy. Imagine government stimulating the residential housing market for federal and sub-national governments to build estates for low and high income earners, because residential housing construction is the most potent component of investment.
No matter the incentives given to private sector, they cannot employ people on a massive scale in the short-run, because their fundamental motive is profit. Not just profit, but targeted rate of profit. When the economy has recovered and is on its normal trajectory, then private sector comes in. After all, private sector is the cause of most economic recessions. How can they come to rescue it? It is always government that can rescue it.
How can private sector be the cause of economic recession?
This is because when there is decline in economic activities they retrench. For instance, banks are sacking workers but they are declaring profits. They are making profits and at the same time sacking, because they are watching their rate of profits. Many workers in the banking sector are on contracts because they do not want to pay allowances. Also, foreign companies owned by Nigerians, Indians and Lebanese treat Nigerian workers like slaves and they are making huge profits. So, the private sector in any economic system has its objective of profit making. The public sector may not be efficient but it has objective of social welfare. Recent researches from International Monetary Fund (IMF) have shown that public sector investments can enhance growth and be efficient.
The CBN said they want to allocate forex only to end users, what is your position on this?
CBN wants to give forex to those who will really use it for manufacturing and not to people who will use it to import sardine from China. They will give forex to those who will import capital goods for production, so that in the long-run, those capital goods can be manufactured in Nigeria, because our economy is not producing anything. We are a consuming economy, even the caps our chiefs wear in Nigeria are imported from China. The CBN wants to give the scarce forex to those who can produce goods for export, not necessarily finished goods, but some items within the value chain. The forex is scarce because it is not our currency. So, it must be allocated to those who will utilise it properly for production.
Nigeria’s foreign trade dropped by N2.5trillion, what are the economic implications?
It means we have a trade deficit because we import more than we export. What we should worry about is to look at the current account in GDP ratio. This also brings deficit. Meaning, the current account in GDP ratio is in deficit and our primary balance is also in deficit. It implies that, we have what is called twin deficits, and it is not healthy for the economy. This means the external sector is in crisis and the domestic economy is also in crisis. The fact that trade enhances growth is imperial, because if for instance, Nigeria is trading with US, the trade is not on equal terms, as the two countries are not the same. America used to buy our oil and they stopped. Is our tax system the same with US? Will US accept Nigerian goods, or will they say such goods are substandard?
The Managing Director of IMF, Christine Lagarde, advised government to ensure fiscal discipline and the need to restructure the tax system for more revenue generation. What is your take on this?
I think it is time we tell IMF and World Bank what we want as a country. Before now IMF said Nigeria’s economy was doing badly, but Nigerian experts said the same thing and we have the data. Let government use Nigerian experts who have been trained to drive the economy because they live here and they understand the country well. Not only in economic matters, but in security issues, even in building roads. For instance, let local engineers be used in road construction, but let government tell them the quality of roads we need. Let us practice what is called Economic Nationalism where government allows certain parts of the economy to be controlled by Nigerians and Africans. For example, why should a Lebanese own a barber’s shop? Our Small and Medium Enterprises (SMEs) sub-sector can create jobs, but the inputs they need to produce are imported, but in US, SME operator can get his inputs from another SME. The early Nigerian leaders were very strategic in thinking. They built refineries, machine tool industry in Osogbo, Ajaokuta steel company, Paper mill industry and others. Now we import everything.
What is your expectation for 2016?
I want to see adequate implementation of the budget.
In talking about non-oil, how about manufacturing and the industrial sectors that are in comatose?
These sectors are not doing well for several reasons. They do not have access to loans, and interest rate is very high, no infrastructure to enhance their growth and the inputs they need are imported. Even, when there was forex, they did not import machines, instead they imported finished goods from America, Europe and China. So, as government said the budget will finance infrastructure, I hope they will do that. But to be honest, they cannot do everything in just one year. If they start, it will be good, and there will be a roll over. May be within three years they would have built infrastructure and put in place certain things to enable us produce manufactured goods for export.
When we say export, not that they will export the finished goods, but they can export some items in that chain. Agriculture is a renewable resource that government can also target. We also have solid minerals, though not renewable, but we have not harnessed them, so it looks like this government is ready for that. When the budget is approved, in six months we should begin to see result, and there should be quarterly or half year report to monitor progress on how the budget is being implemented. This implies that the National Planning must have a very strong monitoring and evaluation department.
How will you assess Buhari now?
He came in, in May 2015 and it is still early to assess him on some economic issues, because there is no data for assessment now. I need data to analyse the economy in concrete terms before assessment. On the economy, he is putting things in place, and I need a year to assess him, because this is his first budget. He promised to fight corruption and he is doing that. He is tackling insecurity, and the rate of bombings and attacks have reduced, even as government has reclaimed territories taken over by Boko Haram. So, government has made progress in tackling insecurity and we must be honest about that. Now, the Economic and Financial Crimes Commission (EFCC), Independent Corrupt Practices and Other Related Offences Commission (ICPC)are working, arrests have been made, but we want to see convictions.