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NIGERIA: How to win

By Henry Boyo

THE above is the title of the lead paper presented at the 2nd Vanguard Economic Discourse, on Friday, April 13, 2018.

This year’s theme was titled; “Economy in Rebound: Pitfalls, Trajectories, and Resetting”. The keynote speaker, Mr. Bode Agusto, Chief Executive Officer of Bode Augusto & Co is an ICAN fellow, and a Finance Professional by vocation; he admittedly, also, taught himself Economics and Industry Analysis, in order to “understand how macro-economic issues and economic dynamics impact his client’s finances”. Agusto served as Director General and Adviser (Budget Matters) during President Obansajo’s tenure.

The rest of this article will highlight some of the salient observations, made by the keynote speaker, while related comments will be made wherever necessary by this writer. Agusto, began his presentation by debunking the following ‘myths’ in our county. First Myth: “Nigeria is an oil rich country”; False. “In 2013, oil revenue per person was US$520 when crude oil prices averaged US$100/barrel, whereas in Qatar and Kuwait, it was US$31,000 and US$27,000/person respectively”.


Second Myth: “Nigeria’s Population is a strength”; False. “Population is only a strength, if it is well educated, and healthy” and if the economy has capacity “to provide them with employment, and also sustain households’ income to buy goods and services produced by several businesses”.

Third Myth: “Nigeria’s debt to GDP ratio is below 20%, so we have one of the lowest ratios and we therefore have additional leverage to continue borrowing to finance fiscal deficits. Incidentally, large population does not necessarily generate greater tax revenues, nonetheless, in Nigeria, we don’t (readily) pay taxes, consequently, debt ratio as a percentage of revenue would be a more meaningful assessment; such ratio would immediately spike government’s local currency debts well above 325% of all revenues, when compared with the median of 200% for countries in Africa and Middle East”.

Furthermore, the current interest burden on government’s loans is estimated at 50% of FGN revenues, “whereas Portugal, for example, with a debt/National income ratio of 130% applies only 11% of reserves to pay interest on her loans!”

Agusto disagrees with the notion that “our problems cannot be solved”, and argues instead that, “with sincerity of purpose and presence of mind, our problems, can infact be solved”; consequently, he believes that “we can still return our country to the path of growth and prosperity”. Nonetheless, the accounts guru, identifies the following five key sectors as drivers in every economy.

The first three sectors i.e. the Central government, the external and the financial sectors, are usually identified as drivers of the businesses and consumer sectors, while inflation, however, interest and exchange rates were identified by Agusto as  the three key prices in every economy; the rate of inflation is considered to be the most important amongst the three key prices, because, it drives both interest and exchange rates.

Agusto recognizes that stable exchange rates will remain impossible, inflation cannot remain at best practice levels below 3%, while uncontrolled population growth will be Nigeria’s biggest problem, if our population continues to increase by five million, annually.

Sadly, “non-oil taxes presently represent about 4% of National income in Nigeria, while the same non-oil subhead taxes in Ghana, Kenya and South Africa are 16%, 17% and 24% respectively of national income”. Furthermore, available records suggest that government’s obligatory annual spending is already more than 100% of actual revenue and this therefore clearly constrains government’s ability to spend on social services and infrastructure without resort to more costly borrowings. Agusto therefore admonished that, whenever government has to borrow it must do so at very low interest rates.

The financial guru, also suggested that we have replaced Paris Club with Abuja Club debts; with the banking system, the pension funds and foreign private investors as holders of these new debts. Consequently, “the finances of the government” according to Agusto, “is presently broken and we need to fix it”, otherwise government will not be able to fulfill its purpose.

In order to fix it, government must do unpopular things, such as: population control, cutting of costs, enforcement of tax compliances and relinquishment of government control over infrastructure spending, and also sell down some of our oil and gas assets so that the proceeds can be applied to critical infrastructure, such as the ports, railways and the national grid.

However, for the external sector, of the economy, Agusto recommends that government should establish; NGN/USD exchange rates that reflects purchasing power parity, while investor friendly policies will improve the competitiveness of Made-in-Nigeria goods. Agusto seems amused that although the administration is keen to ensure stable naira to dollar exchange rate, however, they still seem unconcerned with the well over 10% difference in the long term rate of inflation between the two currencies. Consequently, “whenever our central bank is short of dollars, they become compelled to allow large devaluations”. This according to Agusto was how NGN/USD exchange rate moved from 1:1 to 360:1 in our lifetime.

In place of the present regulated exchange rate; Agusto’s paper recognizes that pegging Naira to dollar is not a viable option because “we don’t have sufficient a reserves to back up the 10% difference between naira and dollar inflation rates”, consequently Agusto has recommended the adoption of the crawling peg option which allow the naira to appreciate or depreciate against the dollar by a rate which is close to the difference in inflation rates between the two currencies.

Agusto recommends that inflation should be kept below 3%/annum, to protect the Naira rate of exchange, while progressive social and economic measures, that will support inclusive growth and enhance the capacity of banks to remain healthy to lend to businesses will be adopted, while government’s loans should also be kept within statutory limits. Sadly, according to the financial guru, the present rate of unemployment and underemployment is already close to 30%, consequently, an increase in the employment rate will invariably also  instigate increasing growth in domestic output.

Curiously, despite his earlier admonition or preference for inflation rates below 3%/annum, Agusto seems to make a somersault to recommend that Nigeria needs ‘to prioritize growth and employment above inflation in the short to medium term”. According to the keynote speaker, if we control our population and grow domestic production significantly, shortages will thin out and inflation will begin to drop; consequently the Speaker warned that “CBN has prioritized price stability over growth and employment”, “they have chose to bring down inflation by stabilizing exchange rate”.

Unfortunately, Agusto’s otherwise sensible paper, would regrettably fall flat if CBN abandoned its prime mandate of price stability as suggested. That infact will be unwise; instructively, inflation will be tamed when CBN ceases to fuel the ‘eternal’ systemic liquidity surplus when it substitutes naira allocations for dollar-derived revenue every month. Quite simple really!

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