Nigerians have created a large and diversified economy that has grown by about 7% a year over the last decade. This has been a remarkable achievement and a testament to Nigeria’s immense potential. The outlook, however, has weakened. Growth in 2015 was 2.7% – its slowest pace since 1999 – and only a modest recovery is expected in 2016. For a country with a rapidly increasing population, this means almost no real economic growth in per capita terms.
On top of the slowdown, vulnerabilities have increased. The ability to manage shocks is restricted by low fiscal savings and reserves. And the weakening oil sector could stress balance sheets and put pressure on the banking system. Reduced confidence and lower capital spending also impact the non-oil corporate sector. Unfortunately, this sector looks less resilient today than during the downturn of 2008-09. Companies that have increased their leverage and US-dollar debt may now come under pressure as they face rising interest rates and a stronger dollar.
Nigeria also has a large regional footprint, and its fortunes affect that of its African neighbours, especially through trade. For example, it is estimated that a 1% reduction in Nigeria’s growth causes a 0.3% reduction in Benin’s growth.
So what can policymakers do? I see an immediate priority: a fundamental change in the way government operates. What do I mean by that? The new reality of low oil prices and revenues means that the fiscal challenge facing government is no longer about how to divide the proceeds of Nigeria’s oil wealth, but about what needs to be done so that Nigeria can deliver to its people the public services they deserve – be it in education, health or infrastructure. Hard decisions will need to be taken on revenue, expenditure, debt and investment going forward.
My policy refrain is three-fold. First, act with resolve by stepping up revenue mobilisation. The first step is to broaden the tax base and reduce leakages by improving compliance and enhancing collection efficiency. At the same time, public finances can be bolstered further to meet the huge expenditure needs. The current value-added tax rate is among the lowest in the world and well below the rates in other ECOWAS members – so some increase should be considered. Second, build resilience by making careful decisions on borrowing. Nigeria’s debt is relatively low at about 12% of GDP. But it weighs heavily on the public purse. About 35 kobo of every naira collected by the federal government is used to service outstanding public debt. Third, exercise restraint by focusing on the quality and efficiency of every naira spent. This is critically important. As more people pay taxes there will, rightly, be increasing pressure to demonstrate that those tax payments are producing improvements in public service delivery. For example, on capital expenditure, the focus must be on high-impact and high-value-added projects. This is why the government is focusing on power, integrated transport and housing. These can help connect centres of activity and drive growth prospects.
On recurrent expenditure, efforts should be made to streamline the cost of government and improve efficiency in public service delivery across the federal and sub-national governments. Transfers and tax expenditures should also be addressed. For example, continuing the move already begun by the government in the 2016 budget to eliminate resources allocated to fuel subsidies would allow more targeted spending, including on innovative social programmes for the most needy. Indeed, fuel subsidies are hard to defend. Not only do they harm the planet, but they rarely help the poor. IMF research shows that more than 40% of fuel price subsidies in developing countries accrue to the richest 20% of households, while only 7% of the benefits go to the poorest 20%. Moreover, the experience here in Nigeria of administering fuel subsidies suggests that it is time for a change.
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