Interview: Razia Khan
How quickly do you believe the administration’s diversification efforts can yield results?
RAZIA KHAN: Low oil prices and reduced oil output should act as a spur to wider reform in Nigeria. When oil prices were in triple digits, it was always unlikely that there would be sufficient momentum behind diversification, and reform was a nice-to-have rather than an economic necessity. Clearly, in a world where Nigeria is forced to budget for lower oil prices for years to come, conditions are meaningfully different. The greatest priority is for Nigeria to diversify its sources of fiscal revenue. This will require both further diversifying its economy (with oil already contributing less than 10% of GDP) and formalising its economy to bring other sectors into the tax net. Agriculture, given its importance to a large number of Nigerians and the crucial role that sector productivity plays in alleviating poverty, seems like the natural place to start. This is likely to go hand-in-hand with Nigeria’s efforts to reduce its import bill. Food is a key contributor to its hard currency requirement. Given its demographics, Nigeria’s food import bill would grow sizeably in the absence of a concerted effort to increase agricultural productivity. The development of other segments, including agri-processing, is likely to require improved infrastructure, especially power sector upgrades.
Nigeria was already part of the way through a power sector reform process when it was hit by weaker oil prices at the end of 2014. It is important to the long-term economic outlook that these reforms are now seen through. Despite current high levels of inflation stemming from the foreign exchange (forex) shortage of recent months, it would be wrong to try to curb the power sector tariffs that are necessary for attracting greater investment into the sector. Cost-reflective tariffs are necessary if Nigeria is to resolve its power sector bottleneck. In the absence of cost-reflective tariffs, weak power availability threatens to erode the economic diversification effort. Nigeria cannot afford this. Lastly, for an economy that has long relied on economic rents, the allocation of oil earnings and prized monopoly licenses, there is a need for far-reaching reforms if Nigeria is going to fulfil its potential. The business environment needs to improve significantly if Nigeria is to become more of a production economy than a rentier or “allocation” economy. Significant deregulation will be needed in a number of sectors in order to free up private sector potential and create opportunities for entrepreneurs. Job growth can no longer be driven by the public sector alone. Nigeria will need to foster private sector growth to drive meaningful and sustained job creation that can absorb its ever-growing pool of labour.
What policy changes could be made to develop the investment climate in Nigeria?
KHAN: A number of quick wins spring to mind which should allow for meaningful improvements to the business climate. Of these, the most important reform, which allowed Nigeria to better prepare itself for a world of lower oil prices, has already occurred. This was the effort to achieve a more flexible, market-determined forex rate. With Nigeria now running a current account deficit, the old regime of a fixed forex rate no longer suits the needs of the country. It would have resulted in a dangerous level of pressure on forex reserves. The authorities did well to step away from the fixed forex regime.
Further deregulation will now also be needed in a number of other sectors if Nigeria is to attract greater investment. A positive effort by the authorities, aimed at enhancing the business climate and making it easier to invest in Nigeria, will go a long way towards the establishment of a more business-friendly reputation internationally. Nigeria has vast potential and is attractive demographically. But greater regulatory certainty is needed to lock in the investment that will allow Nigeria to realise its growth potential.
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