Much ado about Brexit

I must say that I have found the hysteria around Britain’s decision to leave the EU very amusing. Some of the comments made by persons thousands of miles away (*sideeye* John Kerry, Reuben Abati etc) have been quite comical. First, let me say I voted for Britain to leave and I’ve explained my reasons in another post

I find it amusing that people, knowledgeable ones at that, used the volatility in the stock and currency markets within the first 48hours post the referendum as their justification and evidence of the economic woe that the Brexiteers did not appreciate would be the outcome of a leave scenario. If we place this initial volatility (markets have since calmed down) in proper context then surely this can hardly be used as evidence to support their doomsday scenario! The financial markets were mainly positioned and expected a ‘remain’ outcome. This is evidenced by the overwhelming support ‘Remainers’ received in London, Europe’s financial centre. With the referendum itself being a binary event, surely the initial volatility recorded in the markets was a rational and inevitable reaction to new information rather than a confirmation of economic doomsday or that the British economy had all of a sudden fallen off an irreversible cliff.


The outcome of the Brexit referendum is such that over the long term a multiplicity of economic scenarios is possible. Britain could lose out with the EU gaining, Europe could lose out with Britain gaining, both Europe and Britain could gain and all of these could happen to various degrees over various time periods. Crucially what will determine or more appropriately influence the likelihood of occurrence of any of these scenarios is the future trade deal that will be agreed between Britain and the EU. This crucial trade agreement of course is currently unknown. So how anyone can make categorical and hysterical statement about the foolishness or wisdom of Britain voting to leave at this point is completely befuddling.


The Brexit vote has political and economic implications. The long term political implication in my opinion is harder to guesstimate. But we can make reasonable assumptions on the economic implication without reaching any final conclusion as we don’t have adequate information to form the basis of any finality.


Assumption 1 – the fact is Britain maintains a trade deficit with the EU. The deficit was £25billion as at end of Q1 2016. According to Destatis, a leading provider of official German economic statistics, Germany’s trade surplus with Britain in 2015 was €50b. What this implies is that Britain is a key export market not just for the EU but for its number one backer Germany. Unless Germany and the EU have lined up other countries or regions to replace Britain as a trading partner, it can’t be in their best interest to take and be unwilling to move from a position that may impact Britain’s economy negatively. So my fluid assumption is that the EU would prefer a trade agreement that at least maintains the current economic status quo and is within the long-term run rate trade balance with Britain.


Assumption 2 – whatever trade agreement is finalised between Britain and the EU will be subject to non-exclusivity. This implies that Britain will be able to agree trade deals with other countries and regions that it had been unable to in the last 43years of EU membership. What this further implies is that other countries will at a minimum be competing for part of Britain’s existing trade relationship with the EU. If Britain can improve its productivity then it may be able to agree trade deals with multiple countries without each separate deal cannibalising the other. My fluid assumption here is that agreeing a mutually beneficial trade deal is in each nation’s best interest – we are not in a cold war environment after all.


Assumption 3 – free movement of people. This is the big one. It is so because it has security, political and economic angles potentially influencing its final outcome. The free movement of people has been a boon to the global economy over the last 30 to 40 years. It is not in Britain’s best interest to be too restrictive on immigration especially when one considers that Britain and the developed West as a whole is an ageing population. This demographic change is going to be an economic headwind for developed countries that governments of developed countries have to deal with. The UK for example is currently behind in its fertility replacement rate at 1.9 (EU – 1.4 but needs 2.1 as do all developed countries). That is, working population is reducing whilst retirees is expanding with higher life expectancy due to improvements in healthcare and technology.


Whilst it’s true that markets, especially the financial one dislike uncertainty and seek to imply this in the price of financial instruments, this can work both ways. The market can force the EU to negotiate a trade deal its European Commission President categorically stated months ago Britain will never get whilst simultaneously also forcing Britain to accept free movement of people that it is loath to accept as mentioned by Brexiteers during the referendum campaign. This is a possibility because economic growth in Europe is still anaemic despite the ECB’s humongous quantitative easing programme and that any unreasonable trade deal with Britain will be as damaging to the EU as it may be to Britain.


Further, Britain remains a full member of the EU with attendant rights, obligations and trade even after it triggers Article 50 and puts a clock on the deadline by which a deal must be agreed with the EU. As this article is yet to be triggered and it may take a while yet, there’s little need for panic or hysteria by all concerned.


London as a financial centre has a lot of positives going for it. It already has the infrastructure to support financial markets and maintaining this moat in a final EU/Britain trade agreement should be one of the easier parts of the negotiation. Britain can simply agree as it already does to always have equivalence legislation with all ESMA regulations. It can also agree to translate ESMA’s directives (note: ESMA Regulations are compulsory but Directives are open to national interpretation) to UK legislation as long as it doesn’t contradict UK law.


I cannot imagine that countries like China, Japan, Singapore, other Asian markets, the US wouldn’t want the opportunity to enter into a trade agreement with the UK. President Obama and more recently John Kerry’s comment about UK being at the back of the queue on trade agreements is quite frankly juvenile. Nations can and have negotiated multiple agreements simultaneously. Besides the economic reasons why a mutually beneficial agreement needs to be encouraged and reached between EU and Britain, there’s also the security angle. Britain’s GCHQ and security services are known to be the best if not one of the best in the world. Britain is one of the few countries that is meeting and committed to maintaining the 2% of GDP expenditure on defence. Cooperation with Britain on terrorism and the various security challenges the world is currently facing is paramount if the world hopes to conquer these challenges.


So keep calm and keep on Brexit.




Much ado about Brexit

Rationalising governance beyond ‘economic diversification’

One of the often used words by President Buhari, Vice President Osinbajo and others on their team during the last general election and the year since is “economic diversification”. The Presidency believes our economy isn’t diversified and aims to cure Nigeria’s overdependence on the oil and gas sector.

Periodic economic data released by the good people at Nigeria Bureau of Statistics suggests that our economy is divided into 19 activity sectors and as much as 46 if we are to expand to activity sub-sectors. The data released for Q1 2016 GDP suggests that the oil sector contributed 10.3% to our GDP whilst the non-oil sector contributed a staggering 89.7% of economic activity. What is unfortunate is that the oil sector contributes over 70% of government’s revenue and some 90% of government’s foreign revenue. According to IMF’s assessment of Nigeria in a report released in April 2016, Nigeria’s non-oil tax revenue has been on average a meagre 4% of GDP for the past 8 years against 14% for Indonesia and 16% for oil exporters. IMF’s assessment suggests that government’s non-oil revenue based on current activity within the non-oil sector should actually be 18%, well ahead of comparable oil exporters. The report goes on further to show that government’s take of corporate income tax (CIT) is a paltry 1% of GDP against 4.5% for other oil exporters and 4.6% for Indonesia.


What this tells us is that economic diversification isn’t the issue that requires resolution but government’s source of revenue. The government depends far too much on the oil sector for revenue. This isn’t the fault of the citizens but government laziness especially during the military era. There appears to be a mindset within Nigeria and certainly within the various levels of government that if the government does well, then Nigeria does well. This is evident in the existence of various industry cabals and the ease with which industries in face of any difficulty clamour for government patronage or protection. We need to change our mindset to that which dictates that when businesses do well, then government does well. Our government has to depend politically on its citizens and economically on businesses rather than resource rent. This change of mindset is absolutely critical if we are to successfully shift our economic structure to one that is market based. The government of President Buhari and the CBN have commendably taken a big step towards this by liberalising the foreign exchange regime. Its next focus has to be on improving the ease of doing business in Nigeria as well as its efficiency at collecting tax revenue and broadening the tax base in the near term. Whilst it has attached tax collection efficiency and improved collaboration with FIRS in its bailout condition for States and Local governments, it needs to do a lot more at the federal level.


As a left leaning government, some of the measures and steps this government needs to take will be counterintuitive and will fly against what a populist or socialist government will intuitively want to do. This government is predisposed to economic interventions and big government. It wants to revive Nigeria Airways, Nigeria Railways, Ajaokuta Steel amongst others – which suggests it believes government (or this government) can run businesses better even when there’s evidence (hello River’s monorail) in recent history of members of this government ruining businesses.


The ease of doing business report makes for horror reading and is quite clear what the government needs to focus on. Rather than market intervention, the government should stay out of the way of businesses by having as few regulations as possible. Government should focus on reducing bureaucracy and red tape around registering businesses and collecting taxes. The government will do much more for businesses by concentrating on infrastructural development than interventions. The IMF cautioned in its report mentioned above (page 19, item 29) that government’s intervention in agriculture is distorting allocation of resources and investment decisions with further unintended adverse consequences.


Linked to improving the business environment, the government needs to make it easier for Nigerian manufacturers to export their goods and services. The Doing Business (DB) report showed that it takes 159 hours to complete export border compliance procedure in Lagos against 108 hours in Sub-Saharan Africa and 15 hours in OECD countries. It cost $786 for export border compliance in Lagos against $542 in Sub-Saharan Africa and $160 in OECD countries. For export documentary compliance, it takes 131 hours in Lagos against 97 hours in Sub-Saharan Africa or 5 hours in OECD countries. The assessment of the difficulty in importing to Nigeria is even worse than exporting. Overall, the report concludes that Nigeria scored 18.05 DTF on Trading Across Borders, which is a whopping 82% below the best performer. The DB cost methodology excludes tariffs as well as cost of domestic transport, meaning it is all self-imposed non-necessity or graft or in Nigerian parlance corruption. These additional costs never make it into government purse.


As part of its restructure and optimisation of the sources of government revenue, I’ll advocate that the government elevates CIT, VAT and PAYE above tariffs collected on imports and exports. Whatever the government gives up in those tariffs can be made up in CIT, VAT and PAYE which are more linked to economic activity. By reducing its emphasis on import and export tariffs, the government will be able to reduce the bureaucracy and red tape within our customs. The current importance of revenue generation by customs directly feeds the bureaucratic monsters that are the custom officials which has turned officers into demagogues whose favour businesses court. I’d suggest that government changes the mix of compensation for custom officers. For example, if the average wage of a custom officer is N100k, I’d make 30% of that basic or guaranteed with the remainder linked to how close our ease of Doing Business rating is to OECD countries. I’d also add a government discretionary bonus (up to 2.5x basic) to the total compensation as a means of incentivising officers to suggest ways of improving our customs processes and follow through to implementation. Officers that are a hindrance to efficiency will only get basic salary or worse lose their employment.


Finally as part of the reduction of the cost of governance, I think the government needs to privatise or hand-off several of the research institutes listed in the federal budget. For example, the Federal Ministry of Science & Technology has about N54b budgeted to it. The ministry has 96 research institutes under it. Less than 15% of the Ministry’s budget is actually allocated to the ministerial headquarters, meaning 85% is consumed by the various institutes. From that N46b consumed by the institutes, about half (N23b) of it goes on personnel cost with the remainder marked for capital expenditure. Please note that a lot of the capital expenditure is ‘purchase of motor vehicles’, hardly a catalyst for economic recovery. The question is, we have been supporting these research institutes for years, what exactly have we received as return on our investment? If the personnel working within these institutes believe they add value, then let them source for funding from the private sector. The privatisation does not need to be politicised or made complicated. It can be done through a simple management buyout (MBO) with the government selling the institutes to their management for a nominal fee, say N1m. The management of these institutes can then prove their usefulness by selling their research to the private industry. They can even sell their research abroad if there are takers and be a source of forex to our newly floated FX market. I am almost certain that the first thing the management will do once privatised is lay off unnecessary staff that are currently a burden to government. Of course government can give grants to support life changing or economically important researches at its discretion.


Our civic focus on the reduction of the cost of governance needs to go beyond #OpenNASS.



Rationalising governance beyond ‘economic diversification’

Punishing businesses, rewarding politicians

One of our innate desires as humans is to seek comfort wherever we may find it. Being comfortable is our motivation for why we do most things. We work to afford things that’ll make us comfortable, comfort is a key consideration when searching for a partner (business or social), and we seek relief from pain sometimes going to extreme measure such as taking drugs (hard) to get comfort. We seek comfort even for pride or ego’s sake. We exercise for comfort, drink alcoholic and non-alcoholic beverages for comfort, socialise or engage in other relaxation activities for comfort. We also seek comfort at societal level. It is why we want justice and equity to right wrongs, real or perceived. In general, we find comfort satisfying. 

This innate desire for comfort is also central to decisions made in politics, economics or enterprise. We reward businesses that help us maximise our comfort utility by continuing to patronize such businesses. When we’re truly satisfied we also help such businesses, mostly altruistically, through a marketing phenomenon known as ‘word of mouth’. In contrast, we tend to punish businesses with unsatisfactory products or services by taking our custom elsewhere or through the same word of mouth spread our dissatisfaction (e.g. Arik Air). It is why customer satisfaction is a critical success factor for any business that hopes to do well and why businesses often operate on the mantra that the customer is always right. Further, and in democratic politics, we generally reward politicians or political parties that make our lives (more) comfortable with votes and keep them in office whilst punishing those that make our lives miserable by voting them out of office. Well, the last part of the previous sentence is how democratic politics should work. In Nigeria, this doesn’t seem to be the case, at least at societal level.


This phenomenon is most observable at sub-federal level as it is difficult to ascertain why citizens have kept voting for the same politician or party given the failure of governance since our return to democracy. For example, in Ogun State, why was Gbenga Daniel rewarded with two terms of office? Did he or his party really improve the lives of the citizens of the state? Take Osun State and Governor Aregbesola as another example, has he improved the comfort level of the residents of the state? The economic stats doesn’t (and certainly his financial management) suggest he has, yet people turned out in droves for him and rewarded him with two terms of office. Or Benue State where Governors Akume and Suswam were rewarded with two full terms with little to show as reward for the citizens of the state. This continued reward of politicians where there is elevated doubt about their impact on the comfort levels of their citizens seems quite irrational to me and goes against what should be the natural and logical reaction of citizens to unsatisfactory governance. In the case of Osun, for example, what would have been rational is that even if APC apologists in the state can’t quite bring themselves to voting for other parties, abstaining from voting all together should have been their rational reaction. Commendation, however, should go to the residents of Lagos, they’ve consistently voted for the party that has improved their comfort levels, resisting the urge to change in 2015 even though familiarity and the shadow of the Jagaban proved almost too tempting to switch parties. Even if the resources of Lagos don’t quite match the outcome of governance, progress of Lagos over the years relative to other states can’t be denied.


So the question is why have we continued to struggle to react rationally to the failure of governance? The simplistic answer, though with a measure of truth, is ethnicity. In the years immediately following independence, persons from the North ruled Nigeria. This neither made the North’s development catch up with the South West’s pre-independence level of development nor make it keep pace with the rate at which the East developed. This trend of the tribe of the occupier of the Presidency (or its pre-1999 equivalent) having no developmental impact on his indigent region has continued to this day. That one’s tribesman is occupying the Presidency hasn’t in our history translated into tribal or ethnic socio-economic development. Voting along ethnic lines has been an irrational reaction to continued reward of politicians and political parties.


The more complex reason I believe is that our democracy is still largely non-participatory. By non-participatory I mean that at the onset of the 4th republic, elections were easy to rig so the will of the people was not always reflected in the outcome of elections. Whilst it has become harder to rig, and whilst one could argue that the last presidential election reflected the will of the people, the elections in general were still fraught with irregularities, voter intimidation and election rigging. The most fundamental reason though, in my opinion, is that the Constitution of the Federal Republic on which the foundation of our democracy is based is almost fatally flawed. The present Constitution, like past rigged elections, doesn’t reflect the will of the people. It certainly wasn’t drafted by the people or their representative. The document was designed by the military and a few privileged Nigerians, to become binding on all Nigerians. For example, the document as currently designed implies that Nigerians can’t be trusted to govern themselves in the manner they deem fit within each federating unit. Although the Republic is referred to as “Federal”, none of the federating units willingly gave up the rights and powers to the federal government. Rather, majority of the powers as contained in the “exclusive legislative list” were taken by the federal government through military might with the military allocating whatever weakened right or power they wanted to the State and Local governments. Democracy should be a government of the people, by the people and for the people. By definition, the people should collectively determine which of their inalienable human rights they want to give up to their government. The power of the government, in form and substance, at any level must devolve from its citizens. The citizens must be able to take back or amend such powers whenever they deem fit. Since our return to democracy and it’s been 16 years, there has been no attempt to fix the flaw in our Constitution and worse the citizens have been unable to compel their representatives in the legislature to review the Constitution to reflect their will on how they want to be organized as a society politically and economically. Basically, we have a political inclusion problem.


One of the things that we could do to improve the political inclusion, participation and the exercise of our civic duties is to separate the general election cycle of the various levels of government, specifically the executive and legislative ones. I advocate that the general election for the executive arm be separated by at least two years from that of the legislature, at all levels of government. As our democracy is still very much based on party politics, this separation could potentially help focus the minds of the legislators on their oversight responsibility of the executive as any underperformance of the executive in the two years preceding the legislative elections would impact the legislators whose party control the executive. Legislators will not only need to participate in policy formation, but will need to closely monitor policy implementation as well as any deviation from initial estimated impact. The memory of citizens will also be short which would potentially require more than stomach infrastructure to persuade them to append their vote for a particular candidate or party. Further, this separation should enable citizens to track government performance against election manifesto better. If politicians expect increased scrutiny of their election manifesto and delivery, they’ll be persuaded to only promise what they can deliver or better not change tack when they get into office.


This last paragraph of course assumes that we will begin to punish politicians for bad governance delivery as we punish businesses when we’re an unsatisfied customer.

Punishing businesses, rewarding politicians