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Is diversification of the economy possible?

By Henry Boyo

In the wake of public concerns on the impact of tumbling oil price on government revenue and expenditure in the 2015 budget, the Finance and Coordinating Minister of the Economy, Dr Okonjo Iweala, recently assured a joint Legislative Committee on Finance and National Planning that “we have calculated that in order to help us regain stability, we need a minimum of about $5bn.”

Dr Iweala also confirmed that since we currently have about $4.1bn in the Excess Crude Account (ECA), we would simply require the addition of just $1bn to maintain the revenue and expenditure projections in the 2015 – 17 medium term expenditure framework.

Nonetheless, the current 25% drop in oil prices will similarly surely reduce crude oil revenue and make it difficult for us to rely on any surplus from this source to top up the E.C.A; it may be realistic, therefore, under such circumstances to simply transfer the required $1bn from the central bank’s relatively buoyant self-styled own reserves of about $40bn. The alternative would be to borrow $1bn from external source(s); however, one may argue that it does not make sense to incur such debt, at any cost, from possibly the same foreign banks in which CBN’s reserves are currently domiciled with minimal yield!

The Minister also assured that the Economic Management Team was “on top of the situation”  to   proffer measures that would help to ensure that the “common man” did not feel the impact of the oil price decline. Some of the measures proposed by the Minister to fund the revenue shortfall include the trimming of trainings and overseas travels and the restriction of expenditure to only critical and essential items.

In addition, the Federal Inland Revenue Service’s  (FIRS) oversight by international financial consultants, Mckinsey, should, according to the minister, also increase government tax receipts and boost revenue. However, we must wonder why the finance ministry disapproves of the use of private tax consultants to increase revenue in various states, while the Federal Government freely indulges itself with the Mckinsey engagement to collect tax.

Furthermore, according to the minister, the government would also introduce taxes on luxury items such as private jets, yachts, alcoholic beverages and expensive cars.

Conversely, however, Mr. Larry Etta, the president of Nigeria’s Employers’ Consultative Association (NECA) observed that the new government policy is a cosmetic approach to the current financial crisis; the NECA president maintained that the only lasting solution should be a major reduction on the overhead expenditure of the three tiers of government as well as other agencies and departments of state.

In the same vein, a former president of the Association of National Accountants of Nigeria, Dr. Samuel Nzekwe noted in media reports that increasing or taxing more utilities is not the major solution and therefore suggested that “apart from tax on luxuries, government should also look at how to diversify the economy by creating an enabling environment so that industries can thrive; Nigerians must surely be concerned that it took the fall in crude oil prices to jolt the government to recognise the skewed nature of Nigeria’s current tax regime in which the masses bear the greater burden.

Indeed, in spite of Okonjo Iweala’s assurances of best practice management of our public finance, we must wonder why the Honourable Minister still appears  incapable of redressing the heavily lopsided current expenditure budget in favour of capital and infrastructural enhancement, which barely accounted for less than 30% of all federal revenue in the last three years; curiously the bloated salaries and allowances attached to political office holders may not be affected by the proposed austerity measures. It is also sad that no serious step has so far been taken to implement the Stephen Oransanye’s report which recommended the pruning and merger of some government agencies which were found to have duplicated functions or objectives as a cost saving measure.

Nevertheless, the minister rejected the recommendation of some stakeholders that we should refrain from tying our revenue projections strictly to potential crude oil receipts; some stakeholders however advised that government should respond to the decline in revenues by printing more Naira to fund projects.

The Hon. Minister believes that such prescriptions ignored the elementary principles of economics as liberal printing of Naira would spur inflation and victimize the poor and the middle class.

Consequently, Dr Iweala concluded that the best way to protect the interest of the people was to control inflation, expand the economic base, strengthen sectors that drive growth and boost critical infrastructure and create more jobs.

Regrettably, inspite of this recognition, the effort of the Honourable minister to put a shine on real growth and job opportunities have been so far unrewarded after three years.

Incidentally also, despite Okonjo Iweala’s recognition that reckless printing of Naira will spur inflation, the minister obviously does not seem to also consider that the liberal issues of hundreds of billions of Naira every month as substitutes for allocations of dollar derived revenue also pose similar inflationary threats to the economy.

Although our heavy dependence on crude oil revenue is often fingered as the major cause of our economic challenges, notwithstanding, the economies of several countries have thrived successfully on dependence on just one or two sectors wherever revenue accruals are wisely infused into the economy.

Indeed, Nigeria’s economic and social welfare may still not be different if our relatively bountiful revenue from crude oil is derived from commercial and industrial activities from several sectors, as the dollar export revenue (if any) – from several sectors would buy the same basket of goods that our current crude oil dollars would buy!

This is not to say that there is no gain in pursuing a strategy to diversify the economy, but the truth of course is that economic diversification does not evolve from wishful thinking or the mere mouthing of platitudes.

Successful economic diversification will remain a mirage unless our strategy is underpinned by international best practice which means minimal inflation rate of 1-3% while cost of funds must not exceed 7% across the board to the real sector; additionally special sectors such as agriculture should also attract cost of funds within a range of 0-3%.

It is not as if successive Nigerian governments do not recognise the need to augment government revenue and energize our industrial landscape with increasing job opportunities, but the truth is that all such attempts in sectors such as steel, agriculture wheat farms, Aviation, Shipping etc have so far failed because they are not situated on the requisite platform of price stability that would sustain income values which fuel consumer demand and drive further production.

 


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