Let me start by commending the Chartered Institute of Stockbrokers for its patriotism in using the opportunity of this investiture ceremony to plan a discussion on the Nigerian economy. I thank you for inviting me to be part of it.
And I congratulate Mr. Oluwaseyi Emmanuel Abe on his election as the President and Chairman of the Governing Council of this Institute and his investiture today. I wish him and the Institute enormous success during his tenure.
The theme of this gathering, “Growth: The Only Nigerian Imperative,” is a very important one. We can debate whether growth is the only imperative for us or how to achieve that growth. However, the message conveyed by that theme is clear at this moment in Nigeria’s evolution. Of course, it will be up to the Guest Speaker to give the theme the treatment that he deems fit.
Let me, however, use my privilege as co-chair of this event to say a few words about our economy and some of what needs to be done to get it growing again and creating jobs and wealth for our people in a sustainable manner.
I will go straight to the point: our economy is broken, and if we wait for the oil price to rebound or for crude exports to bounce back or for oil receipts to recover, we may wait for very long and may not be able to fix it.
I say this because our constant complaints about the oil price, pipeline vandals and lack of funds tend to divert and distract us from the real challenges we are facing. To me, our economy is broken because our economic model doesn’t work, and to fix it we need the resolve to restructure our government finances so that we politicians have a real incentive to create a more conducive business environment.
Yes, the current market environment hurts us. Yes, the collapse of crude exports is causing immense hardship and we need new drivers of growth and additional sources of export earnings. Yes, the irresponsible raiding of the Excess Crude Account and the siphoning of money that should have gone to the Federation Account are awfully bad. And yes, the massive corruption at the highest levels that have recently been revealed are important blows to the economy and society.
However, our biggest problem is our addiction to oil revenues; the belief that we are doomed unless oil flows and oil money fills the Federation Account for our tiers of government to share.
Another related, and flawed, belief is that the federal government alone is the only force, the know-all, be all, and do all that would direct and bankroll the diversification of our economy. And we have convinced ourselves, again wrongly, that the only reason that the federal government
is unable to spend money to do all we expect it to do is that the money has been stolen. We must erase that mindset in order for us to begin to climb out of our current depths.
Of course government can use oil receipts to improve the lives and livelihoods of our people, to fix our horrible roads, crumbling schools, ramshackle hospitals and to pay its numerous, but hardly busy, workers. However, oil money is not a requirement for diversifying our economy.
Rather we need federal government officials who are willing to step back and carefully work out how they can empower the private sector to grow the economy and create jobs. And I don’t mean selecting a few companies deemed worthy of government support. No, we need radical reforms that streamline our bureaucracy and eliminate rules and regulations that stifle innovation. We also need robust management processes that ensure that public money buys us better infrastructure, education outcomes and healthcare.
And above all else, we need to understand that our most valuable resource is not our oil; it is our people. All of our people.
The good news is that most Nigerians have forgotten about the oil money and moved on with their lives. The bad news that our governments and political leaders don’t seem to have noticed that shift. A few numbers will illustrate this. When we were still under military rule, through the 1980s and 1990s, oil and gas accounted for roughly one third of our GDP. When I joined the government in 1999, oil and gas accounted for 29%, though at the time – remember that was before the rebasing – we thought oil and gas accounted for almost half of our economic output. But by 2007 the oil and gas share of GDP had already dropped below 20% and by 2015 it had fallen to less than 10%. So while petroleum production levels stayed flat, our people have made all the difference.
But don’t get me wrong: oil revenues have helped. In addition to infrastructure, oil revenues support professional service firms, real estate, the arts and so on. So the indirect effects of the petroleum sector are bigger that the headline figures suggest. But this doesn’t change the fact that due to the ingenuity and hard work of the men and women who looked beyond oil, our economy is much more diversified than we usually acknowledge. In 1980 agriculture contributed 15% of our GDP but by 2015 the figure rose to one quarter. Services which were almost non-existent in the data now add more than one third to domestic output. Even our manufacturing, despite all odds, increased its share from 6.5% of GDP in 1999 to almost 10%, quadrupling its value in real terms and moving on par with oil and gas production.
Unfortunately the move away from oil hasn’t reached all parts of our economy. As you know, our non-oil exports are nowhere near where they ought to be to balance our non-oil imports. But what worries me much more is that even though oil receipts have dropped from a long term average of about 70% of Federal Government revenue to about 50% in the first half of 2016, non-oil receipts are also falling – fast. Between January and June, the federal government collected 1.2 trillion naira in VAT, corporate taxes, customs and excise duties, and various other levies – 13% (or N150 billion) less than it collected over the same period in 2015. Corporate income taxes dropped by 40% over the past two years.
In short, whereas our economy diversified because our non-oil activities took off, the oil share of revenue dropped because our oil revenues have nose-dived, not because the government found new revenue streams. This worries me because I think one of the main reasons why we are suffering, the reason why we are so vulnerable to swings in the oil price, and one of the reasons why we can be held hostage by those willing to blow up export pipelines is that unlike our private sector, our governments have not really embraced diversification. And this at a time when major oil consumers are making massive investments in alternative and renewable energy.
And it has huge implications. The fact that our government literally runs on oil means that we cannot rely on public spending to mitigate the impact of oil slumps in the commodities cycle. Unless we don’t mind going back into a debt trap. According to the Central Bank of Nigeria, in the second quarter of 2016 the Federal Government collected less than half what it expected. It also spent 13% more than it had planned. Consequently in just three months 1.1 trillion naira shortfall was created as well as roughly 700 billion naira primary deficit, about the amount the federal government budgeted for the entire fiscal year.
In the same second quarter of 2016 the Federal Government’s interest payments already exceeded its Federation Account allocations, and debt servicing absorbed almost 60% of retained revenue. In fact, 57 out of every 100 naira the federal government received went straight to its creditors.
As you can see, that doesn’t give us a lot of room to maneuver. And it is the reason why government’s efforts to get us out of the current difficulties should proceed in a manner that targets infrastructure improvements, public education, public health and, above all, reforms that remove obstacles to our people unleashing their creative and productive energies to set up and run businesses and create jobs and wealth in the process.
Investors have noticed our predicament. Foreign investment has nearly dried up. In the first half of 2016 the total amount of capital brought into Nigeria was less than $1.4 billion compared to $5.3 billion in the first half of 2015. Direct investment has fallen by half, portfolio investment is down by 87% and our capital and financial accounts are deep in the red. A number of long established foreign businesses announced they were planning to leave and many of those that decided to stay are cutting costs and trimming their payrolls to balance their books. Some respected Nigerian companies are folding up as well.
It is, therefore, clear that rather than praying for higher oil revenues, we should seize the current opportunity to get over our addiction to oil revenues. Discovering new oil wells in the north or south is no substitute. Government should look to sustainable sources of revenue, mainly taxes, duties and other levies. And it can only enlarge the tax base by encouraging diverse economic activities right across the country and investing in human capital development to produce the entrepreneurs, inventors and workers of the future.
We can’t just borrow our way out of our oil addiction. Our governments must live on taxes, the way other democracies do. It will help us live within our means, as it means government can only spend what the people can bear. It will help ensure accountability as tax payers are more likely to ask for accountability when the money comes directly from their pockets.
My dear friends, a move away from oil rents will change our economy for the better. And it will also change our politics for the better.
Thank you for your attention.