Avoiding another lost decade
Between 1983 and 1985, oil prices plunged from over $30 down to $10 a barrel and what had been a vibrant and growing Nigerian economy plunged into a recession that lasted for over 10 years.
It was a bleak period for millions of Nigerians, with thousands of industries shutting down, and the service sector fairing no better, thriving chains of supermarkets such as Kingsway, UTC, Leventis, closed over 1,000 branches, newspaper print runs declined from over a million to less than 100,000, and millions of people were thrown into unemployment. Thousands of educated young people left the country, many who had just returned. Government campaigns deriding ‘Andrew’ for checking out fell on death ears.
The Naira lost over 95% of its value, plunging from N0.75 to $1 all the way down to N22 to $1 (in today’s terms this would be the equivalent of going from N150 to $1 down to N4,400 to $1).
Was this recession the unavoidable consequence of falling oil prices or were there policy errors that exasperated the problem?
Now, 30 years later, are we heading in the same direction? Is it inevitable that we will have another lost decade? Might we be buying $1 with N4,000? Or are their lessons to be learned and can we take a different approach this time?
A few years ago the United States faced a financial crisis and a crash of similar proportions to the great crash of 1929, which heralded in the Great Depression which was for them, also a lost decade. The incoming government applied unprecedented effort and creativity, and spent billions to avoid a lost decade.
Is the Nigerian Government exhibiting a similar level of effort, creativity and resolve to avoid a deep and painful 10-year recession? Is it developing and planning to implement plans far wider in scope and further ranging in their impact than the policies they have implemented in the past?
Our current adversity is an opportunity to make change, to develop and implement policies that can create millions of new jobs, to diversify the economy and to create an industrial base on which future generations can build a prosperity and stability that will last for generations.
The alternative is to watch a decline similar to the 1984 to 1995 decline, but with the added risk of social insecurity that comes with millions of young people out of jobs and out of hope, prepared to throw themselves into any cause and follow any demagogue that offers a promise of hope no matter how distorted or misguided.
Government policy needs to focus on three things; the removal of barriers to speed in business, an industrial policy that looks through the value chain to create both enabling industries and end user industries, and the creative financing of the industrial policy through a form of quantitative easing that can succeed in emerging markets such as Nigeria without leading to uncontrollable inflationary pressure.
Reducing the barriers to doing business
The Empire State Building was for over 40 years the tallest building in the world and to this day remains an iconic architectural symbol of progress and achievement. It was first conceived in 1929 and the design, building permission and construction were completed within three years and the building opened its doors in 1931.
Here in Nigeria, a major project can often take 3 years just to get government approval.
The first task of government must be to review, reduce and eliminate the many barriers and layers of regulation that it has put up to getting things done in Nigeria. It is partly because of this disease that Nigeria is rated as one of the most unfriendly countries for doing business in the world. Its effect is to cause most major undertakings to take twice as long and cost much more than embarking on the same project elsewhere and for every project that is successfully completed an unknown number are abandoned during the bureaucratic process, and for many more firms and entrepreneurs don’t even bother. Curing this disease is a low hanging fruit that doesn’t even cost the country any money.
Developing an effective Industrial Policy
Nigeria’s last major industrial policy was import-substitution; it was initiated in the mid 1970s and was pursued aggressively until the mid 1980s. The policy did not succeed primarily because it did not address the entire value chain, and when input prices changed (due to devaluation) most of the import-substituting industries that were built during the 1970s and first half of the 1980s shut down (this has already started happening in this cycle, with many plants reducing shifts in 2016 due to lack of ability to access foreign exchange).
Most products that we buy, start off as materials dug up from the ground (or grown) by a primary industry, these materials pass through a number of intermediate (processor) industries, before going through an end user industry after which it is sold to a user (as opposed to being sold to a company where it is an input).
In order to succeed, Nigeria must develop an industrial policy that encourages the development of industries through the whole supply chain, rather than just the end user industries. This entails picking 5 to 10 strategic industries and providing incentives to the private sector to make the required investment at all stages in the supply chain (such that 90% of the costs within the industry come from a Naira base).
As an example, Nigeria sorely needs a rail network that traverses every state of the Federation, reducing the cost of moving bulk goods and people across the country and providing a foundation for an industrial economy. Such a network would enable the inexpensive movement of oil, gas, coal, iron and steel, rice, cement and other basic, industrial and agricultural commodities, and support the development of refineries, power plants, commercial plantations and factories across the country.
Addressing such a project in the business as usual way would be unaffordable and consume significant foreign exchange.
Within the context of an industrial policy, the major component industries would be identified and the private sector would be incentivised to build additional cement factories and precast concrete plants to manufacture the sleepers, to build iron ore mines, steel plants and rolling mills to manufacture rail, splicers and pins and other plants to produce other components for the network.
The policy would also encourage the development of engineering firms that have the capacity to meet the needs for machine tools, production equipment and the parts for maintenance. As well as re-orient many of the educational institutions to focus on training to support manpower requirements. The result being that most of the value used in targeted industries can be sourced locally.
A similar approach can be taken to building any number of industries, such as five hundred thousand homes a year, developing a domestic power generating industry, an automobile industry, toys, furniture, oil & gas, electrical goods, etc.
An industrial policy of this nature can be used to create millions of new jobs, as well as a thriving local industry.
The mechanism for encouraging the private sector to build the required plants would be through Central Bank guaranteed purchase orders, specifying the local content, the requirement for local manufacture and the required quality specifications.
The purchase orders will encourage the private sector to build the required plant and distribution capacity for the finished products (the purchase orders will specify quality and local content required). The central bank will finance the budget for the purchase orders by creating new money, a form of quantitative easing (QE).
Unlike QE as deployed in developed countries, where the focus is on asset purchases and the biggest beneficiaries are owners of financial assets, this type of QE would be used to finance an industrial policy and the development of an industrial base.
Government would issue guaranteed purchase orders (a liability for the central bank and an asset for the recipient of the order) for goods made in Nigeria, and targeted at the strategic industries, which it wishes to develop.
The recipients of the purchase orders would take their new assets to raise loans and equity (liabilities) to build plants to fulfil the terms of their purchase orders. On delivery they will receive cash from the central bank in exchange for their purchase order (asset). The central bank may then sell the goods for cash (or more practically it will sell the purchase order at a discount to distributors and businesses in end user industries). At which point the central bank will receive cash to offset its liability (the purchase orders).
The money it receives from the sale would then be destroyed, thereby eliminating the inflationary pressure that could be created from its intervention, whilst the proper supply chain planning and domestic content requirement of the purchase order, minimises the foreign exchange demand of the initiative.
This way government would be able to finance the creation of an industrial base, without adverse inflation or pressure on the foreign exchange markets.
This would not be the first time that the Nigerian government has financed a deficit by expanding the money supply. During the 1980s and 1990s the Nigerian government ran a persistent deficit, financed partly by printing money. However, because the money was spent to fund social programs that did not create new productive revenue generating or job creating assets, the result was net negative for the country. Over the period the value of the Naira plummeted from US$1 to N0.75 to US$1 to N22 (a loss of over 95% of its value).
As we start 2016, the government again has a deficit without any visible means of financing it. Most observers are led to conclude that the deficit will be financed by printing money (as was the practice in the 1980s and 1990s), as the budget stands much of the deficit spending is on social programs that are aimed at ‘helping’ the largest segments of the population. However, our own recent history tell us that they are unlikely to result in the creation of permanent jobs or value creating assets and would most likely lead to inflationary pressures, which will hurt the very people they are aimed at helping.
Unless the Nigerian government makes a concerted effort starting now and continuing for the next ten years, to remove the bureaucratic obstacles to doing business, to develop an industrial policy that focus on the creation of real value in terms of tradable goods and the jobs that come with making them locally, and develop creative means to finance such a policy, the risk is high that over the next ten years, Nigeria will again move backwards and suffer the unavoidable social consequences of being unable to provide improving quality of life for Nigerians.
• Edozie is a former Marketing Director at Virgin Group in the UK and MTN Nigeria. He currently runs a consulting and venture investment firm in Lagos.