Ominous cloud over Nigeria’s economy

Posted by: Chikodi Okereocha in Featured, News 8 hours ago

If recent disclosures that Nigeria’s economic buffers are fast depleting are anything to go by, uncertainty is hovering over the nation’s economy. But some economic and finance experts insist the disclosures might be aimed at diverting Nigerians’ attention from asking critical questions on how the economy is allegedly being mismanaged, report

A few days ago, Central Bank of Nigeria (CBN) Governor Mallam Sanusi Lamido Sanusi sent shivers down the spine of not a few Nigerians when he drew their attention to the dire consequences of the continuous depletion of the country’s fiscal buffers. Sanusi raised the alarm that both the Excess Crude Account (ECA) and the external reserves have depleted, a development, which, he said, undermines the ability of the apex bank to sustain exchange rate stability.

The CBN boss, who disclosed this at the end of the bi-monthly meeting of the Monetary Policy Committee of the apex bank, expressed concerns that the absence of such fiscal buffers increases the country’s reliance on portfolio flows, thus constituting the principal risk to exchange rate stability, especially with uncertainties around capital flows and oil price. Sanusi, who decried the continuous fall in revenue from oil despite the stable price of oil and production in 2013, acknowledged output losses due to theft and vandalism. But he was quick to point out that this could not wholly explain the magnitude of the shortfall in revenue.

But for Mrs Ngozi Okonjo-Iweala, Minister of Finance and Co-ordinating Minister for the Economy, who, at the just concluded World Economic Forum in Davos, Switzerland, also raised the alarm that the economy is under threat on account of the continuous decline of the ECA, many people would probably have dismissed Sanusi as a hoax, considering his penchant for making controversial policy statements. Mrs Okonjo-Iweala said the ECA had gone down to an all time low of $2.5 billion, warning that the sharp decline has made the country more vulnerable than it was in the past.

The ECA, in which the country saves revenue above the benchmark oil price set in the budget, stood at $8.65 billion as at end of 2012. The Finance Minister, however, explained that as a cushion against the depletion: “We have tried to set the country’s main parameters in a very modest way. We have made our budget at a very reasonable benchmark price for oil. This is to shield us and to ensure we are not subjected to any volatility there may be in the oil market.”

However, Sanusi and Mrs Okonjo-Iweala’s explanations have failed to impress economic experts, finance analysts and stakeholders in various sectors, who argue that there may be more than meets the eye in the claims that revenue from oil is going down and consequently, the country’s economic buffers are drying up.

Henry Boyo, economist and frontline industrialist, is one of those who are not swayed by such claims. He believes that the claims are mere hogwash designed to bamboozle Nigerians. Boyo said: “Its grand deception. Whether advertently or inadvertently, to me as a layman, it is deception. We are being taken for a ride.”

He described it as red herring contrived to distract the attention of Nigerians from asking real and critical question on how the economy is being managed.

As Boyo argued, the stage for the alleged grand deception was set when, in the process of setting the budget, which is the country’s operating plan, its formulators allegedly deliberately contrived that the country would receive less revenue than it should actually receive.

“If in addition to that,” he explained, “you now receive more revenue after you have nonetheless borrowed at between 10-15 per cent interest rate to cover the deficit that became necessary because you understated what your revenue would be; because if you have deliberately understated your revenue expectation to start with, and then you now have more income than expected but because you have borrowed to cover the deficit between expenditure and your projected spending, whether capital or recurrent, does that make sense? Can a surplus and a deficit exist side by side? The answer is no.”

While insisting that the whole set up screams fraud, the renowned economist said: “You cannot have an ECA when you have a deficit. You cannot be saying you are building up an excess crude account when your budget is predicated on a deficit, especially when the so-called ECA is seating idly, earning little or no interest. Besides, you now consume it in addition to the borrowing you borrowed to finance the contrived deficit.”

Boyo said the deficit is contrived because if the projected revenue expectation from crude oil is at the rate of $75 or whatever dollars per barrel and throughout the whole time the price of crude oil stood above 100 dollars per barrel. He added that even if production constraints and theft of crude, which of course, Sanusi acknowledged, takes away 20 per cent in terms of volume from the sales the country is expecting instead of 2.5 million barrels per day, the economy would still not be in a precarious fiscal position.

Boyo also wondered how the nation’s reserves could have dried up on account of shortfall in revenue from oil when only a few months back, Petroleum Minister Diezani Allison Madueke gave herself and the country thumbs up for exceeding her production quota.

“There might be production shortfalls in some days, but there were production surpluses in other days. In addition to that, if cumulatively we lost production by 20 per cent, for instance, the difference between the 77 or 75 dollars per barrel and 100 dollars is close to 33 per cent because your budget benchmark is $75, but instead of 75 you are earning more than $25 more per barrel,” he said.

Continuing, he said: “$25 expressed as a fraction of $75 that you used is about 33 per cent. So if you lost 20 per cent in volume and you gained 33 per cent in price how can you have such a huge deficit to start with that you are financing? If revenue from oil is going down how did they get the surplus? How can you have surplus and deficit at the same time? And how and why must you have borrowed to cover the deficit and similarly consume the surplus you said you gathered above $75 per barrel? Is that not fraud or deceit of some sort?”

The industrialist is not done. He does not see any economic reason for the CBN keeping $40 billion as special reserve when the economy is supposedly dangling on a cliff.

“Why is it that in spite of our indebtedness CBN is sitting on $40 billion, which we cannot use to pay debt and we cannot use for infrastructure enhancement, but it can only be available for CBN to donate and allocate as it wishes?”Boyo asked.

But how does the CBN accumulate the $40 billion? According to Boyo, 80 per cent of the revenue that goes to the three tiers of government every month is from crude oil and is earned in dollars, with the CBN claiming that it has the right to hold on to those dollar revenues transferred to it from the Nigeria National Petroleum Corporation (NNPC) or any other dollar earning agency of government; CBN holds on to those dollars and print in place of those dollars fresh naira supply and use it to pay allocations to the three tiers of government.

In doing that, the CBN inadvertently throws the economy into more confusion, according to Boyo. He said: “Once CBN has printed and created fresh naira supplies and giving out the naira equivalent at whatever rate of exchange it decides to convert at, it means that the apex bank on one side is busy deluging the system with fresh naira supplies that creates excess liquidity that makes it necessary for the same central bank to go back and mop it up again. On the other hand, CBN’s own reserves of dollars keep increasing. So, the more naira they give to you the higher is their dollar supply.”

Also curious to Boyo and other observers of the dynamics of the Nigerian economy is the fact that the supposed collapse of the fiscal buffers is coming at a time when various government revenue-generating agencies have strengthened their capacity, resulting in growing revenue inflow into government coffers. Overall, there has been appreciable increase revenue from the non-oil sector. For instance, in 2012 fiscal year alone, the Federal Inland Revenue Service (FIRS) realised as much as N5.007 trillion from taxes. The amount, the highest cumulative tax collected in the history of the FIRS, represented an increase of N379.4 billion or 8.20 per cent over the N4.628 trillion collected in 2011.

Before Mrs Ifueko Omoigui-Okauru, immediate past executive chairman of FIRS left office, she said in about 11 years, the cumulative revenue from the FIRS hit N21.7 trillion, with N7.53 trillion coming from non-oil sources, while over N13.036 trillion was realised oil revenue during the period. Other revenue-generating agencies such as the Nigeria Customs Service (NCS), NNPC, and the Nigerian Maritime Administration and Safety Agency (NIMASA) among others, have also shored up their revenue target.

Boyo said if the revenue target of the FIRS has come down since the exit of Mrs Omoigui-Okauru, as well as other agencies, the Federal Government should be asking questions rather than confusing Nigerians by painting a gloomy picture of an economy that ordinarily should be buoyant.

The industrialist is not alone in his worries over the direction of the economy. Alaba Olusemore, the Managing Consultant, Nesbet Consulting, a Lagos-based firm of finance and management consultancy, is also worried. While noting that the currency denomination the allocation is shared, whether dollar or naira, is not the issue provided it is channelled at production instead of consumption, he said: “The whole story of the depletion of our economic buffers has not been told,” adding that there must be something those managing the economy are not telling Nigerians especially since secrecy is now the name of the game, and people no longer want to be transparent.

Olusemore listed some factors that could be responsible for the depleting fiscal buffers. According to him, government may have been spending too much on security to contain the threat of Boko Haram insurgents. Besides, the CBN may have been taking money from the external reserves to stabilise the exchange rate of the naira. Also, a lot of money, he alleged, may have been expended on meeting some political exigencies ahead of the 2015 general election.

“2015 is around the corner, and politics in Nigeria means money; a lot of resources may have been expended on projects based on political exigencies rather than economic,” he told The Nation.

But to Obiora Akabogu, a Lagos-based lawyer, and Boyo, putting the blame on politics might sound too simplistic, as the depleted ECA and external reserves may not go back to their former buoyant position after the 2015 elections. To him, the problem has to do more with poor economic management than politics. According to him, Ghana, which recently had elections, never depleted her reserves. He described the declining of the country’s external reserves and ECA as ‘a strange development and an inexplicable paradox.’ According to him, given the fairly stable price of Nigeria’s crude oil in the international market, the reverse should be the case, with the ECA and external reserves ballooning rather than depleting. He insisted that many things do not add up in the claims of Sanusi and Mrs Okonjo-Iweala, noting that the situation is, indeed, a cause for worry.

For instance, Akabogu expressed worries that if indeed the economic buffers, which are basically savings for the rainy day, have plunged to such disturbing levels, the confidence of foreign investors on Nigeria would be eroded.

He said: “The development would discourage foreign investors as their confidence on Nigeria would seriously decline. Already, there is donor fatigue because our foreign development partners now lack confidence in our fiscal system. Besides, foreign investors are now shifting attention to more economically stable countries such as Ghana, South Africa, and even Benin Republic.” He also expressed fears that the drying up of the country’s fiscal buffers constitutes serious threat to national security.

Akabogu said the precarious position of the country’s economy is largely fuelled by corruption. He said that corruption is responsible for the situation where projects are executed and implemented haphazardly such that they have become drain pipes. He cited the case of the Lagos-Ibadan Expressway and Lagos-Ore-Benin Expressway projects, which, despite being captured in almost every budget since the inception of democracy in 1999, are far from completed. He expressed regrets that in spite of the fact that corruption has been established as a major threat to democracy anywhere in the world, Nigeria, at moment, lack strong institutions to tackle the menace, which is largely responsible for the situation where Nigeria is ranked as one of the countries with the lowest life expectancy rate in Sub-Saharan Africa.

He lamented that from the inception of democratic governance in Nigeria in 1999 till date, successive governments have repeatedly urged Nigerians to tighten their belts as a result of the so-called economic reforms.

“When will the belt tightening seize?” he asked. That is a question that millions of Nigerians would probably continue to raise for a long time to come as the economic landscape, for now, does not offer much hope of a quick end to the belt tightening exercise especially now that virtually all the economic buffers are collapsing.