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How the inevitable economic downturn will affect you (1)

By Dele Sobowale

“We have not seen the impact of the falling oil prices in Nigeria; it will start this month [November 2014]. Dr Ngozi Okonjo-Iweala, Finance Minister, November 13, 2014.

Never in the recorded history of the Nigerian economy had the illusions of government officials given way so quickly to reality in the face of unrelenting facts than this admission by the Coordinating Minister on the Economy, CME, than this. Just a month ago, she was assuring Nigerians that declining oil prices posed no threat to the nation’s economy. “We are not broke” she thundered; and for good measure pointed to the mid-month rise of our external reserves to further reassure the nation that she was in control of events.

Like a magician, ever afraid that the tricks might be exposed, she had hoped that all will be well by the end of October. Unfortunately, things got worse. The price of crude oil fell below $80 a few days after she spoke and the external reserves went down from the previous month by October 31. End of illusions should bring about the embrace of reality.

Unfortunately, the CME, whose grip on events is now very shaky, still clings to mirages. When she announced that “We have to drive the non-oil revenue base to be able to weather the storm that is coming”, she sounds to some of us like the drowning man grasping at straws and hoping to ride it to shore. To start with, the storm is not “just coming”; it was here months ago. But, those who have been sharing Excess Crude Oil Account money, forgetting that any reserves not replenished eventually vanishes, deluded themselves that the gravy will continue to flow forever. But, even school girls know that nothing lasts eternally; not good times; not bad times. Nigeria had just finished its seven fat years – without a Joseph (well there were UniJankara dreamers) to warn us and without a “Pharaoh” ready to listen to somebody not in government.

Furthermore, why have we waited until now to “drive the non-oil revenue base”? More to the point, since “driving the non-oil revenue base” will not immediately yield the desired result, why not try cost-cutting which can provide some immediate relief?

The Finance Minister would remember, in Cambridge, Massachusetts, USA, Polaroid Corporation, a stone throw from MIT, where she studied. In 1974, when the Arab Oil embargo sent most of the global economies on a downward spiral, I worked as a Financial Analyst for Polaroid (Ayo Olagunjoye, former National Bank MD is my witness). When revenue fell drastically, the company had two options. The first was to rush some new products to the market; the second was to reduce costs. The Marketing, Production, Accounting, Administration staff held a three-day at what was billed as “Corporate Survival Meeting” – which lasted for three days.

At the end, the Financial Analysis people were able to persuade our colleagues that it was faster and better to cut costs first. Because the details are too long to be presented here, let me just state that we cut back on allowances, over-time pay, medical expenses, free lunch programme etc. Within three days we had identified about nine percent of operational costs which could be reduced without retrenching staff – which was a last resort. Even when we eventually came to that a basic principle was applied. In less than two months, we had pared our monthly operational costs by close to fifteen per cent without any major lay-off of staff.

By contrast, one of my friends, whose company directed the sales department, to come up with a major sales and marketing drive, to keep revenue from falling, discovered to its dismay, that attempting to get more money out of increasingly empty pockets was like trying to climb Mount Everest. The reason is simple.

Revenue generation is not totally within government’s control and the mechanisms for collection might not yet be in place and might even take time (for instance, it might need new bills or amendments to existing laws etc). When new laws are required, especially with elections coming round the corner, any bill to increase taxes and tariffs, tenement rates, vehicle and driver’s licences etc will be difficult to get through the legislature. No politician seeking votes in February wants to be accused of adding to the burdens of the people.

Cost cutting, however, is more easily controlled by those in charge. It is easier to send a circular stopping all seminars, overseas travel for meetings on matters which can be settled by e-mail; banning civil servants (including SFG) from attending political rallies at public expense; reduce access to the use of planes in the Presidential fleet; order all public servants below Permanent Secretaries to fly economy; to hold meetings, workshops, seminars at less expensive hotels instead of TRANSCORP etc. And, all these can take effect within two weeks and reduce the outward flow of cash. It is all a variant of the old adage “A bird in hand is worth two in the bush”. Billions would be saved very quickly in a short time. Most importantly, government will have a tighter grip on events.

If all else fails, Jonathan should ask any doctor in Aso Rock.  He will confirm that you stand a better chance of saving a patient losing blood by stopping the outflow first than by trying to supply new blood.

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