Setting Agenda – What Jonathan Must Focus On to Move Nigeria’s Economy Forward

 

Nigeria’s economic potential is well known. The country’s considerable resource endowment and coastal location ordinarily should allow the emergence of a strong growth pole for sub-Saharan Africa.

Over the years, Nigeria has realised very little of this potential. Instead, its history has been marked by economic stagnation and associated with declining welfare and social instability.
Over the last few years, however, policy makers have said that Nigeria has been experiencing a growth turn-around and conditions seem right for launching onto a path of sustained and rapid growth. President Goodluck Jonathan seems anxious to seize this opportunity to begin to build a diversified economy able to provide jobs and improved welfare for Nigerians. Although the economy was said to be growing, it has not been translated into putting food on the table of many Nigerians. It was a growth without development.

Jonathan’s transformation agenda: Concerned by this development after the election and its politicking around the place, the President at a meeting with the organised private sector, May 23, unveiled his transformation agenda for the economy, saying he will be at the driving seat of the implementation as the chairman of the National Economic team. Yes, it is time for Mr. President to think economy, speak economy, dream economy and act on the economy.

He said there would be a comprehensive review of import subsidies and waivers granted to companies, adding that only companies expanding domestic production and creating jobs would be considered for such incentives. Renowned Professor of Economics, Prof. Jeffrey Sachs, has identified rural integration, urban integration, infrastructure and family planning as the critical factors to the transformation of the nation’s economy and its emergence as one of the top twenty economies in the world. The problem that needed to be tackled is the duality of the nation’s economy.

Duality of the economy: The duality between the formal and informal sectors is an important factor in the lack of competitiveness of the non-oil sector. In each of the major sectors of the non-oil economy, there is a sharp divide between a small number of highly productive, internationally competitive producers and a very large number of small producers/service providers with low productivity.
The duality of the economy results in a lack of dynamism and competition. A very high proportion of firms are long-established businesses. As in the rest of the world, the longer established a Nigerian firm is the less dynamic it becomes in terms of growing output and employment. Addressing the duality of the economy is, therefore, vital for strengthening and sustaining job creation.

As he enters into the next phase of his administration, the President must realise that consistent with the high level of informality and low productivity in the economy, job creation is insufficient: only an estimated 5-10 per cent of the estimated six million new entrants into the labour market find jobs and wages are low. Youth unemployment 15-29 years is estimated at about 60 per cent.

Further research is needed to ascertain whether labour laws strike the right balance between the incentive provided to employers to increase employment by increasing the flexibility to hire and fire and reducing personal benefits on the one hand, and the rights of workers on the other.

The President should also realise that the tenure which ends Sunday faced with the stack economic reality had set up an economic crisis management committee headed by the President Umaru Yar’Adua himself. The committee was to coordinate a new economic framework, did not achieve much. So the President heading the economic management team is not new but what Nigerians expect is result and positive action on the economic front.

Devt challenges
Nigeria today faces two fundamental development challenges that are common to natural resource dependent economies. These are managing the macro-economy to build and maintain strong competitiveness of the non-oil sector in the face of considerable external inflows from oil; addressing the culture of rent seeking and corruption created by access to “easy” oil rents which reduces incentives to create wealth that can be taxed. Dependence on oil rents as opposed to taxation reduces government accountability and, therefore, undermines the effectiveness of political and economic institutions.

Nigeria has historically been less successful than other resource dependent economies in addressing these challenges. This government must address this issue of rent seeking squarely. For the country to advance its economy raising productivity and efficiency at the firm level and also across the economy, including through shifting, the structure of production towards higher valued added activities, should be at the heart of the President’s strategy in moving the economy forward. This cannot be achieved without a stronger human capital base and improved use of technology.

Across the globe, knowledge economy has put nations in higher pedestal than natural resources endowment. The President needs top develop long-term strategies urgently in both areas to guide action. This would mean that government has to kick-start preparation of a long term plan for education.

Most immediate constraints

Research report suggests that the most immediate constraints that need to be addressed in order to move the economy forward include infrastructure, notably power and roads, and the business environment, in that order. Enhancing access to finance will also allow the economy’s considerable resources to be intermediated more effectively for private sector growth. Policy action in each area will have to pay special attention to the challenge of helping Nigerian firms make the transition from informality to the formal sector.
While the domestic market is relatively large, it is small compared with even small European economies like that of Belgium. Nigeria cannot rely on the domestic market alone to sustain rapid growth over the long term and will need to access regional and global markets as well. Nevertheless, domestic trade needs to and indeed can be used more effectively than in the past to promote firm efficiency and productivity and provide a platform for the emergence of firms able to compete in global markets. In the short and medium term, domestic and regional trade can be important drivers of growth and can help to build the economy.

Actions to improve the functioning of domestic markets will therefore also be an important part of the growth agenda.

The numerous special programmes to support specific areas of activity need to be consistent with the long term objective of strengthening the productivity and competitiveness of the economy. They need to be based on the analysis of the costs and benefits of different options and built on transparency and accountability for results.

Way forward: The President could, therefore, strategically focus his attention on first relieving the constraints to specific high potential growth areas (specific value chains and growth poles). In addition, in some areas, policies need to be fine-tuned to ensure that they enhance productivity. In other areas, new measures are needed for greater impact. Several of the areas of action are under the purview of the Federal Government but considerable action is also needed at the level of the states. Greater coordination and collaboration is, therefore, required between the federal and state governments in the context of a framework through which reforms can achieve growth.
Improving access to long term finance, will also be important to ensuring that Nigeria’s considerable oil resources are intermediated more effectively in support of non-oil growth. The focus in these areas would need to be first on early wins through successful pilots for competitiveness improvements in selected high potential value chains and high growth areas.

On agriculture

In agriculture, which represents 23 per cent of GDP, declining yields is a major policy challenge. Productivity has declined for both commercial and food crops in Nigeria over the last 20 years. For commercial crops, production levels have fallen as well. In contrast, production levels of food crops have increased substantially and Nigeria has overcome the extreme import dependence for basic foodstuffs which occurred in the 1980s.

However, growth has been driven by a steady and substantial increase in the area cultivated and harvested while yield levels have dropped. In the case of roots and tubers, for example, a four-fold increase in the area planted since the mid-1980s has been accompanied by a decline in yields in excess of 40 percent. Similar but less dramatic outcomes are observed for cereals, beans and groundnuts. In contrast, at the international level yields have been increasing.

It will take time to bridge the international competitiveness gap in agriculture. Thus, the strategic focus for the short term should be on improving the competitiveness of Nigerian agriculture in domestic and regional markets. Growth is likely to continue to be led by small-holder farmers looking to improve their incomes and, therefore, measures to enhance their productivity are important. For the longer term the strategic focus should be on restoring the competitiveness of traditional exports and promoting newer, high value exports. Competitiveness in these products would benefit from larger scale investments than smallholders are able to undertake.

Therefore, improving the investment climate so that large-scale investment may eventually resume in Nigerian agriculture will be crucial. Nigeria’s manufacturing sector has shrunk from 8.4 per cent in 1980 to 5.5 per cent in 1999 and 4.6 per cent in 2005 and further in 2010. It is ranked number 83 of 117 countries on the UNIDO Competitive Performance Index (CPI). Manufacturing value added per capita has stagnated at around $17 between 1990 and 2002, compared with increases from $133 to $273 for Indonesia and $600 to $1066 for Mexico over the same period.

Key areas for further growth

Manufacturing firms tend to be small, tend not to invest at all or to invest very little, and have to have low technology intensity. They typically do not engage in exports and also have a lot of unused capacity, averaging 55 per cent. Additional manufacturing and industry growth could come from agro-industry, oil and gas based industrial activity and the development of the solid minerals sector. Tourism is also a potential area for growth that could take off over time as the country’s external image improves.

The service sector represents close to 20 per cent of GDP compared with 60-65 per cent for major regional services hubs in Africa. Key areas for further growth include banking and finance and transportation, particularly air transportation. In both areas Nigeria could become a regional hub. Nigerian airlines and banks are already beginning to extend services to several neighboring countries.

In the domestic market, there is also strong room for growth in the supply of services to the oil and gas sector by Nigerian firms. Nigeria’s aspiration is to increase its crude oil reserves from the current level of about 35 billion barrels to 40 billion barrels by 2010 and to almost double production to 4 million barrels per day. The country’s gas resources are estimated at about 150-160 trillion standard cubic feet (SCF).

Macroeconomic challenges

These are some of the deep-rooted macro-economic and structural challenges that Nigerians and other institutions are concerned with more. The Nigerian economic situation can be aptly described as an interlocking set of vicious circles that perpetuate economic stagnation, and rural poverty. One of these circles involves the savings, investment gap in rural Nigeria. In Nigeria, productivity is low because investment is low. Investment is low because savings is low; savings is low because income is low; income is low because productivity is low.

That is the situation bulk of the population is going through today except the few who have gotten hold of money one way or the other, fair or foul. Available statistics show that Nigeria’s nominal Gross Domestic Products in dollar terms was $48.2 billion in 2000, $51.2billion in 2001, $49.163billion in 2002, $56.04billion in 2003, $64.73billion in 2004 and estimated to record $73.148billion in 2005. The real GDP growth was 2.8 per cent in 2000, 4.4 per cent in 2001, 3.3 per cent in 2002, 5.5 per cent in 2003, 6.1 per cent in 2004 and estimated at 3.9 for 2005. The GDP per capita has a record of $420 in 2000, $435 in 2001, $407 in 2002, $452 in 2003, $510 in 2004 and estimated at $562 in 2005.

In the opinion of the World Bank, between 1965 to 1987, Nigeria’s Gross Domestic Savings decreased from 17 per cent to 10 per cent and lower in 2000. In comparing 12 countries growth rate, it was discovered that during the two decades from 1965 to 1987 the World Bank found that Korea, with a population of 42 million in 1987, joined the rank of middle income countries by increasing its per capita income from US$650 to US$2,400.

During this same period Malaysia and Brazil accomplished the same while Nigeria’s per capita income managed to record $510 in 2004 from the $440 in 1965 with a high population of 127 million in 2004. What this means is that Nigeria’s per capita rose by $60 in 40 years. In 2001 it rose to $432; $407 in 2002, $452 in 2003 and is estimated to rise further to $510 this year.

This implies that in 2004, Nigerians welfare was not anywhere near what Indonesia, Malaysia and Brazil attained in 1987. In the same period, the World Bank observed that Korea’s industrial share in GNP increased from 25 to 42 per cent; in Indonesia from 13 to 32 per cent and in Argentina about 42 pe rcent of GNP. By World Bank calculation, the most potent factor in economic growth is gross domestic savings. From 1965 to 1986 Korea’s savings rate increased from eight to 35 per cent; for Indonesia from eight per cent to 24 per cent; for India from 16 per cent to 21 per cent.

For Nigeria, it decreased from 17 per cent to 10 per cent and for Japan it was maintained at 32 per cent. The situation in Nigeria remains largely the same as savings have not improved beyond what it was in the 1980s if not worse off. Going by World Bank reckoning, while Korea achieved about 94 per cent level of secondary school and tertiary enrolment, Nigeria, during the same period (1965-1986) achieved 29 per cent and ha now declined to 24 per cent.

Implications: The implication is that while these other countries have reached a self sustaining growth, Nigeria has been trapped in debt, $35 billion in 2004 for which its officials are jumping from one country to another begging for debt forgiveness, and population explosion 127 million in 2004. The effect is that the living standard of the populace has declined and dragged more Nigerians into the poverty line.

In fact, a recent study showed that more than 70 per cent of Nigerians live below one dollar a day though government figure has contradicted this. The situation has not changed much by the reckoning of the average citizen. Dr. Ngozi Okonjo-Iweala, Managing Director, World Bank and one-time Minister of Finance had said Nigeria and other oil exporting countries face the danger of dwindling revenue as the world search for alternative source of energy and must act quickly to diversify their revenue base.

She said: “Oil is a very difficult thing to forecast. You see the volatility, the movement of oil prices, the trend is down and oil is about $82 a barrel. If I am not mistaking, this is a far cry from the $147 that we are talking about not so long ago. What does this mean, there is so much volatility in the oil market. We do not know where the price is going to, if these developed countries go into recession the demand for oil will fall and that will have an impact on the price unless OPEC decides to restrict supply even more. If you are in that position it means you have to be much more prudent with your budgeting.

The President has come to realise one of the areas that has been a drain to the economy – waivers and concessions. In the last 10 to 20 years, civil servants and top government functionaries have used their discretionary power to favour a few in the economy through waivers and concessions. Most of those waivers were to the benefit of individuals not the entire sector or economy. Most for selfish end.

The President put it rightly when he said: “Frequently, businesses request for subsidies and waivers to import a wide range of products many of which could be produced locally with some investment and government incentives. Government is undertaking a comprehensive review of subsidies and waivers. The review has become necessary because subsidies and waivers have many adverse effects on the economy, depletion of foreign reserves because it promotes imports, undermining of competition and local production as well as exporting jobs. Henceforth, special consideration and concessions will be granted only to businesses that are developing value-chains, building needed infrastructure, expanding domestic production and creating jobs.”

The intervention of government in the economy has become all the more important because the Nigerian economy is still largely driven by the public sector. The proportion of resources in the Public sector of the economy is still disproportionately high. Nigerians must support the President averred vision as he said: “I am fully committed to transforming governance and the economy. My government will give the greatest weight to efficiency, creativity and innovation in governance ad ensure value for money, competitiveness and over ridding interest of our nation in all decision making.”

Elaborating on the trust of the economic transformation agenda, the President said the focus would be on job creation as he said: “Our security challenges will greatly diminish if we can create jobs for most of our productive population that is, those in the 16-44 age group. To create jobs, government will strongly discourage the importation of products that are either being produced or can be produced in Nigeria. My government is fully committed to achieving self sufficiency in some products that we currently import such as rice, in petroleum products, petro-chemicals, and iron and steel. I believe that by 2015 we should not be importing rice or fertilizers. We can’t be flaring gas and be importing fertilizer.”

Areas for urgent attention

: Another challenge that the President must address quickly is the rising domestic debt in the face of high oil prices. Government borrowing has risen sharply, increasing by more than 50 per cent since the start of the year, compared to private sector credit growth of just three percent over the same period.Yet the head of the Debt Management Office, Dr. Abraham Nwankwo, has pointed to a debt-to-GDP ratio of 16 per cent that is expected to remain stable, depending on the rate of economic growth, suggesting Nigeria could easily raise more debt if needed.

Also in need of urgent attention is the level of capital flight. The capital flight that hit the Nigeria economy since 2007 has continued unabated as Nigerians, corporate bodies are still moving funds massively out of the country as well as from naira to dollar. As President Jonathan stand in the podium on May 29, to be sworn in as President, commander in chief of the armed forces, the question that will agitate the minds of Nigerians will be “Can this President follow through his plan to transform the economy”? 2115 is not too far, time will tell.