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Task before Economic Advisory Council

The Federal Government announced the members of the Economic Advisory Council on September 16, 2019. The new body which replaces the Economic Management Team that was headed by Vice President Yemi Osinbajo is to be led by Prof Doyin Salami as Chairman; Dr. Mohammed Sagagi, Vice-Chairman; and Dr. Mohammed Adaya Salisu, Secretary, who happens to also be a Senior Special Assistant to the President on Development Policy. Other members are: Prof. Ode Ojowu, Dr. Shehu Yahaya, Dr. Iyabo Masha, Prof. Chukwuma Soludo, Mr. Bismark Rewane. The team is no doubt a top rate one.

The team, however, has a female member, Dr Iyabo Masha, who was until August 2019 the IMF Representative for Sierra Leone. The percentage of female is about 12.5%, a ratio of 1 to 7. Perhaps, President Buhari should have appointed more females for a more gender-balanced composition.

The EAC appears to be modelled after the United States’ National Economic Council, though the Council of Economic Advisers model would have been more institutionalised because the latter was established by the Congress and the members’ appointment is subject to the Senate approval.

As stated in a report by the President’s spokesperson, Femi Adesina, this advisory council, which will be reporting directly to the President, will advise him on economic policy matters, including fiscal analysis, economic growth and a range of internal and global economic issues working with the relevant cabinet members and heads of monetary and fiscal agencies. In addition, the EAC will have monthly technical sessions as well as scheduled quarterly meetings with the President. The chairman may, however, request unscheduled meetings if the need arises (I like this part because it fosters flexibility). One thing is missing: its tenure. We don’t know for how long the EAC will be in existence.

From the face of it, the EAC composition appears to be pro-growth and can kickstart a bullish run on the Nigerian economy, other key factors being equal. It is a good signal and confidence-boosting. And the administration will attract more attention and respect from the international market. We must however face the fact that this administration has about 30-36 active months to consolidate on its recent gains and lay a solid foundation for higher economic growth and create more jobs. Time is running out fast. So, let us take a look at the economic statistics staring at the EAC:

-Gross Domestic Product grew by 1.94% (year-on-year) in real terms in the second quarter of 2019. On a half-year basis, real growth in the first half of 2019 stood at 2.02%.  The Federal Government’s growth estimate for the 2019 fiscal year is 3.01%. But the IMF is projecting a 2.1% growth for 2019.

-Unemployment rate was at 23.1% (Q3 :2018) up from 18.1% a year earlier. The African countries having higher rates than Nigeria are Namibia (33.4%), Angola (29 %), South Africa (29%) and Mozambique (25%). Countries such as Libya (17.3%), Tunisia (15.30%), Rwanda (15%), Kenya (9.30%) have lower rates compared to Nigeria. More details are contained here

-Underemployment was at 20.1% (Q3: 2018)

-Inflation rate at 11.02% (August 2019). The Federal Government’s estimate for 2019 fiscal year is 9.98%

-The key benchmark interest rate (monetary policy rate) is 13.5% with asymmetric corridor at +200/-500 basis points

-Out of the actual 2018 FGN budget of N7.455tn, the debt service was N2.152tn, which represented a 28.8%. The FG also recorded a variance of 23.9% (shortfall) in the total expenditure- N9.120tn vs N7.455tn. The actual amount of debt service was even more than capital expenditure (N2.152 trillion vs N1.743 trillion)

-The key projections contained in the Draft Medium Term Expenditure Framework /Fiscal Strategy Paper 2020-2022 released on September 10, 2019 by the Federal Ministry of Finance, Budget and National Planning are shown thus:  The real GDP growth is projected to be 2.93% (2020), 3.35% (2021), 3.85% (2022). Using an official exchange rate of N305/US$, the real GDP is projected to be US$458bn (2019), US$468bn (2020), US$522bn (2021) and USD588bn (2022). If an exchange rate of N350/US$ which mirrors the actual rate available to much of the population is used, the real GDP will be lower than the projected figures.

-The personal cost (inclusive of pension costs) for 2019 is over N3tn (more than a third of the entire budget) and it is rising. New borrowing as a percentage of total FGN Budget (including Government Owned Enterprises and project-tied loans) between 2020 and 2022 is averaged to be about 15%. Debt service to Revenue ratio (including Government Owned Enterprises and project-tied loans) for the projected period is averaged to be about 34%. Deficit as percentage of FGN Revenue (including GOEs & project-tied loans) is averaged to be about 26%. Capital expenditure as percentage of Non-Debt Expenditure to be about 29% on average. It is 41% in 2019. So the FGN is planning to spend less on CAPEX between 2020-2022. This is strange though. The draft document concludes that “Nigeria faces significant medium-term fiscal challenges, especially with respect to revenue generation and rapid growth in personnel costs”. The draft MTEF 2020-2022 can be downloaded here

                                           

So, what should we expect from this EAC? For one, most if not all the members of the council have a market ideological bent. But they will be reporting to the President who seems not to have a soft spot for free market. Perhaps, the President’s mindset is now changed. Secondly, it is important the apparent ideological differences are resolved from the onset.

Nigeria has been running perennial budget deficits and keeps increasing. It is equally troubling that much of the public debt goes to recurrent expenditure. Eventually, Nigeria will have to adjust. As I mentioned, the EAC does not have much time but a lot can be done. I guess the council will work with the Economic Recovery and Growth Plan of Buhari’s administration. It is its major economic blueprint. The ERGP objectives are to: restore and sustain growth; invest in our people and build a globally competitive economy. Given the ERGP, the EAC would likely tilt towards stabilisation policies for the remaining duration of the administration. This administration ends in 2023.  The first 90 days of the EAC will either confirm a good signal or a bad one. It will show whether the initial optimism will be sustained or will fade away quickly.

Going forward, in its advisory role to the President, the EAC will have to:

  1. Look for more sustainable ways to generate revenue.
  2. Reduce leakages in government spending to the barest minimum.
  3. Help answer the question whether Nigeria (administrative-wise) wants an expansive government or restrictive type.
  4. Decide whether to borrow more from the international markets right now or borrow domestically
  5. Evaluate the question of subsidy/under-recovery in the pump price of petrol
  6. Evaluate the government strategies at generating more revenue from taxes taking into consideration other bottlenecks Nigerian businesses currently face which make them to be less competitive.
  7. Advise the FG whether it is in Nigeria’s interest to go ahead with launching of ‘ECO’, the planned single currency for Economic Community of West African States in 2020; given the divergence criteria in most member States.
  8. Consolidate on the Ease of Doing Business initiative
  9. Work with the monetary authorities to fight inflation.
  10. Fight the unemployment.
  11. Assess the current state of the currency swap deal with China.
  12. Assess the various intervention schemes (not the monetary policy mandate) of the Central Bank of Nigeria in the real sector of the economy.
  13. Ensure a better coordination between Ministries, Government Owned Enterprises (GOEs) and other key agencies.
  14. Ensure Nigeria is an attractive destination for Foreign Investment. It is obvious the quantum of domestic investment can not take Nigeria forward. Nigeria needs on a much bigger scale both the Foreign Direct Investment and Foreign Portfolio Investment.
  15. Look at other areas that need critical infrastructure such as ports, education, works, housing and power. This is also calling their attention to the fact that as contained in the draft MTEF, a reduced amount is proposed to be spent on CAPEX between 2020-2022. This could be counterproductive.

The Federal Government will have to decide on what it wants to do with Government Enterprise and Empowerment Programme and other intervention schemes on the one hand and the new Ministry of Humanitarian Affairs, Disaster Management and Social Development on the other. Does it want to merge them and why?

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