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.