REVENUE DRIVE: Slow, Panicky And Hopeless?

THERE is a popular saying that ‘lightning never strikes in the same place twice’. But President Muhammadu Buhari seems to have defied that myth. In fact, he has proven it is actually possible for lightning to strike in the same location twice.

In 1985, when he was Head of State, Nigeria won the U-16 (now U-17) World Cup in China. Thirty years later, in 2015, he was the President, when the country won the same cup in Chile. Outside sports, what has happened to the economy is a proof that lightning can, in deed, eventually strike the same spot again and again.

Before he took over, in 1983, as Nigeria’s military ruler, oil prices had plummeted, with the country’s export earnings falling by more than half. The liquidity crisis the nation faced made his government to initiate oil countertrade deals (in 1984) in an attempt to dispose of the country’s oil production in the context of a weak world market, while assuring a steady flow of manufactured goods and agro-industrial products to check the decline of its economy resulting from sharply lower export revenues.

And once again, in 2015, oil prices slumped, from $64 a barrel on the day he was sworn in (May 29) to $32 eight months later. Crude oil prices had declined from a peak of $114 barrel in July 2014 to $30.25 per barrel recently. Growth probably fell by half in 2015, from 6.3 per cent to little more than three per cent. Oil accounts for 70 per cent of the government’s revenues and 95 per cent of export earnings. Economic experts have even projected that the government deficit will widen this year to about 3.5 per cent of GDP.

It seems too that pension fund administrators have little else to do with the funds under their management, other than ensuring that they don’t lose them. Granted that the regulation on investment of pension fund assets does not give much room for innovation and discretionary investing on the part of the administrators, it still seems they do even less than required, just to be on the safer side or maybe for lack of better ideas regarding how the funds could be better optimised.”

Since his second coming, Buhari’s economic policies have been consciously conceived to end profligacy, mismanagement of the nation’s revenue and block leakages with a view to saving. However, it is becoming crystal clear that the needed fund to drive an economic and infrastructure development programme is not readily available.

Already, Nigeria has asked the World Bank and African Development Bank for $3.5b in emergency loans to fill a growing gap in the budget. The loan request is intended to help fund a $15b deficit in a budget heavy on public spending.

Finance minister, Kemi Adeosun, told the Financial Times recently that she was planning Nigeria’s first return to bond markets since 2013. Adeosun said the loans were not an ‘emergency’ measure, but rather the ‘cheapest way possible’ to fund a ‘deficit budget’.

The $2.5bn loan from the World Bank and a parallel $1bn loan from the ADB, which would enjoy below-market rates, must still be approved by both banks’ boards.
Under World Bank rules, its loan would be subject to an IMF endorsement of the government’s economic policies and bank officials say they would have to be confident the Nigerian government was undertaking significant structural reforms.

But both loans would carry far fewer conditions than one from the IMF, which does not believe Nigeria needs a fully-fledged international bailout at this point.

Before the country approached the two international banks, the Minister of Power, Works and Housing, Babatunde Fashola, had suggested that accumulated pension funds could be invested in the provision of infrastructure.

Though, the immediate past administration’s recipe for the revival of the comatose economy was introduction of a number of austerity measures that saw reduction in overseas training, imposition of tax on luxury items such as, yachts, private jets and alcohol, with a depleting reserve that is not up to $30b, and oil price falling, there is need to seek ways of funding the 2016 budget proposal that is awaiting passage in the National Assembly outside oil.

Like other commodity exporting countries searching for alternative investments and revenue generation opportunities to close the fiscal gap government is adopting new policy measures geared towards raising revenue.

In furtherance of its renewed non-oil revenue generation drive, the Federal Government directed the major revenue collection agencies, including the Federal Inland Revenue Service, FIRS, and the Nigeria Customs Service to increase their collections by plugging all areas of leakages.

Femi Saibu, an Associate Professor of Macroeconomics at the Department of Economics, University of Lagos (UNILAG), said: “The benefit is that it makes government more accountable and responsible. The people would have to ask more questions now. Before, government ran its affairs from revenue that has nothing to do with the people’s income and people didn’t care what happened to such fund. But if the people were now directly funding government, they would ask government.”

A senior lecturer at the Lagos Business School, Dr. Bongo Adi, said, “rather than taking the easy way out by lending to government in the form of investing in bonds, pension funds should be more creative and innovative in diversifying their portfolio.”

He added, “it seems too that pension fund administrators have little else to do with the funds under their management, other than ensuring that they don’t lose them. Granted that the regulation on investment of pension fund assets does not give much room for innovation and discretionary investing on the part of the administrators, it still seems they do even less than required, just to be on the safer side or maybe for lack of better ideas regarding how the funds could be better optimised.”

Recently, the iShares MSCI Nigeria exchange-traded fund (NGE) tumbled 1.8 per cent after the Central Bank disappointed investors by keeping interest rates on hold at 11 per cent and reiterating a commitment to currency restrictions. The Nigeria fund has been down 32 per cent in the past 12 months, including the 15 per cent drop in January, in line with the percentage drop in oil prices.

The economic situation since the inception of the present administration has been anything, but auspicious. Inheriting an economy that tethered on the edges of collapse, with runaway interest rates, depleting reserves, low oil price and currency crisis as an economist puts it.

Regrettably, the actions of the country’s economic managers have, at best, been uncoordinated and inconsistent at both the fiscal and monetary policy levels thus further exacerbating the nation’s economic problems. The panicky responses evident from a slew of policy interventions and reversals in quick succession have done little to redress the financial crisis facing the country.

Many have thought the administration would have woken up to the enormous discrepancy between campaign rhetoric and empirical reality. The stock market – a veritable indicator of economic health – has plummeted, just as the currency is undergoing free-fall acceleration.

Investors in the Nigerian stock market lost over N1.6 trillion in the first 100 days of President Buhari’s government. At the end of 100 days, the market capitalisation closed at N10.1 trillion, down by over 14 per cent from N11.7 trillion closing value on the last day of the former President Goodluck Ebele Jonathan administration.

The All Share Index (ASI) dropped by over 13 percent to 29,511.1 points from 34.310.9.
Companies in the fast moving consumer goods (FMCG) segment of the market have seen profits eroded in response to massive drop in demand, as consumers are forced into belt-tightening. H1 profits of companies across the sectors have plunged: Unilever (down by 95 per cent), Nigeria Breweries, Cadbury (98 per cent), Nestle (24 per cent), PZ Cussons (33 per cent), Honeywell Flour Mills (33 per cent) etc.

The Central Bank, through its Monetary Policy Committee (MPC), on Tuesday, November 24, 2015 resolved, among other issues, to reduce the MPR from 13 per cent to 11 per cent (representing the lowest since 2009) as well as the CRR from 25 per cent to 20 per cent. It also changed the symmetric corridor of 200 basis points around the MPR to an asymmetric corridor of +200 basis points and 700 basis points, around the MPR.

The decision by the MPC to reduce monetary rates is primarily targeted at stimulating output growth and ease financial speculations induced by high arbitrage.

It is also motivated by the current economic realities as manifested in weak and fragile domestic macroeconomic environment, fall in the international oil price, unrelenting inflationary pressure, declining private and public expenditures.
Economic experts also pointed to three main considerations behind the MPC’s decision:
• The slowing and divergent global economic growth trajectories, especially, as manifested in the growth outlook of emerging and developing economies;
• the deteriorating global trade chiefly occasioned by sustained down turn in international oil price; and
• the MPC decision also leverages on the global monetary policy stance, which appears to be focused on reviving/sustaining growth and employment generation.

The MPC, in a communiqué issued at the end of its first meeting for the 2016 fiscal period in Abuja, observed that while the period of low oil prices, which occurred in 2005, lasted for a maximum of eight months, the current situation was expected to continue over a longer period of time.

With rising inflation at 9.6 per cent in December, some had predicted the apex bank would abandon import restrictions, move naira to a trading band, or even float the currency. But none of that happened.

The country’s apex bank has held the value of the naira stable against the dollar since February 2015, despite the continued fall in the price of oil. The bank has maintained its peg by progressively limiting access to the interbank FX market. This has forced Nigerians seeking dollars to use the parallel ‘black market’ rate offered by bureau de changes.

The bank’s recent decision to end all US dollar sales to these money changers has caused the naira to depreciate on the parallel market. This is, effectively, a devaluation of the only exchange rate that is available to most consumers, which is likely to push up consumer prices.

According to the CBN governor, Godwin Emefiele, the decision to retain the rates was taken in order to ensure that the objective of easing lending to the real sector of the economy was achieved.

Emefiele explained that while the central bank had last November taken steps to encourage Deposit Money Banks to lend to the real sector of the economy, the impact of that decision had yet to be felt.

On the introduction of the N50 stamp duty charge, Emefiele explained that the decision was taken to support the government in its bid to generate more revenue due to the drop in oil prices, adding that the nation’s external reserves currently stood at about $28bn.

The Director, Justice Research Centre (JRC), Donald Inwalomhe, in a chat with The Guardian, said, “while the minister’s plans have been well articulated, the laws hampering the full participation of the states, private persons and foreign interests in investing the pension fund have to be addressed.”

While calling on the Federal authorities and the National Assembly to immediately commence the process of reviewing mining and pension fund laws with a view to removing the hindrances to the maximisation of the potentials of the economy, he said, “it will be a terrible blow to the nation if the fund plunges into the kind of crisis that engulfed the banking sector a few years back, because this can trigger a nationwide socio-economic chaos. The Commission’s involvement of major pension industry stakeholders in the review process is a positive step; but this should be taken further by addressing some of the concerns that have been raised before the final guidelines in investing pension funds are released to avoid confusion in their implementation.”

He said: “This should potentially boost the money market, because, as it stands now, about 60 per cent of pension funds, that is around N4.6tn from 6.5 million contributors, is invested in the more secure Federal Government bonds and other core assets, even though there are other investment opportunities with higher returns. Pension funds are long-term savings that should not be allowed to lie idle, but should be judiciously invested to safeguard the contributors’ money, attract returns and promote economic expansion. It is also important to add that the Pension Reform Act has some grey areas as some stakeholders have pointed out.”

He said, “the declaration by the Minister of Solid Minerals Development, Dr. Kayode Fayemi, that states are now free to explore and exploit their mineral resources has been well received in many quarters. But there are legal bottlenecks that have to be removed before this could become a reality.”

For instance, the Petroleum Act 1969, says: ‘All minerals belong to the Federal Government’. This position is reinforced by the 1999 Constitution (as amended) in Item 39 of the Second Schedule, where it is stated that: ‘all mines and minerals, including oil and gas fields, belong to the Federal Government’.

Consequent upon these extant provisions of the law, the Federal Government has been the sole approving authority for mining licenses and the regulation of the industry. The reality, though, is that there are also “illegal miners” who are exploiting the nation’s mineral resources on their own terms and without government regulation. The tardiness in the administration of this sector has left it hugely under-developed. The nation’s solid minerals have, therefore, remained “a gold mine” waiting to be harnessed so that they can contribute their full quota to national development.

A senior lecturer in the Department of Economics, University of Jos, Associate Professor Wada Ademu, described the emergency loans as unnecessary, untenable and illogical.

Ademu, who spoke with The Guardian, argued that over the years, Nigerians have faulted such bogus borrowing to service emerging budget.

According to him, borrowing is supposed to be used to fund the projects that are intended to improve the life of the citizens.

“Borrowing is supposed to be invested in the projects that are meant to touch the lives of the mass of the people. But in the past, such loans were used for other purposes rather than the ones that would benefit the masses. To this end, the loan is not useful,” he said.

“There is no guarantee that when the loan is taken, from our past experiences, it is going to be used for good purposes that such loans are supposed to be used for. It was in the news that $300m Abacha loot has been recovered. They should use the money. It can create employment. If the price of crude oil rises beyond the predicated budget lines, what is the government going to use the money for? Or if the price falls below the predicated price that the budget is based, is government going to ask for another loan from another body?” he queried.

“My advice is, let us cut our coat to our size. We want to be faster than our legs. One way to do this is for the President to cut his foreign trips. So far, he has undergone about 15 trips since he came on board. That is money; estacodes are there, maintaining the Presidential jets for all these trips. What we need to do is to come back to our own level. Let us go back to iron and steel industry. Let us be factual with this issue of corruption. Some governors who have looted their states’ treasuries are now ministers. Let us go back to the drawing board. Are we really fighting corruption? Are they fighting corruption? Let us address the issue.”