STATE OF THE NIGERIAN ECONOMY

Transcription

1 STATE OF THE NIGERIAN ECONOMY 21 st Nigerian Economic Summit 13-15th October, 2015 Temitope Oshikoya, PhD, MBA, FCIB, CMA CEO, NEXTNOMICS & Chairman, NESG Faculty of Economics Former DG, WAMI/Chief Economist, AFC/Director, AfDB

2 Outline The Nigerian Economy: The Perfect Storm Policy Choices: Between the Hard Rock and the Deep Sea Towards Inclusive Prosperity: Social Market Economy

3 The Perfect Storm - Oil Price Crash: Lower For Longer - Growth is Slowing down - Per capita GDP fell sharply

4 Perfect Economic Storm September 2014 $94 Oil Price Current $46 $168 Exchange Rate N200 $38bn Foreign Reserves $30bn 12% MPR 13% N604bn FAAC N485bn

5 Economic Slowdown September % GDP Growth Current 2.35% 16.00% Manufacturing Growth -3.82% 8.3% Inflation 9.3% N13.6tr NSE N10.3tr 6.4% Unemployment 8.2%

6 The Oil Price Crash: Lower for Longer % Drop in Oil Price Year Low Budget Benchmark Morgan $49 per barrel of crude oil is not seen since Oil Price History Since 1987 Demand Growth in China Record High Price Current price is 50% of $79 level in 2013 Recurrent to capital ratio fell to 82% : 18% Economic Recovery Stanley Projection Recovery Initial Normalisation Rebalancing Over-Supply Global Financial Crisis Jan-01 Jul-02 Jan-04 Jul-05 Aug-06 Nov-06 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Jan-09 Jul-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Base Case Forcast Average. Crude Oil Price (US$/ Barrel) Sources: Bloomberg, CBN, Morgan Stanley Commodity Research

7 Gross Distortion in Prosperity is Rising Inflation Rate Aug 9.34 Jun 9.17 Unemployment Rate 2Q 8.2 1Q 7.6 4Q GDP per Capita Growth 7.06 Mar Jan Q14-2Q15 GDP per Capita Growth USA China Mexico India Indonesia Turkey Inflation Rate, Unemployment Rate China USA Mexico Indonesia Russia India Turkey Misery Index Brazil South Africa 39.2 Nigeria Brazil 42.8 Russia Nigeria Infla1on Rate Unemployment Sources :EIU, CBN, UNDP,CATO INSTITUTE

8 Summary: The Perfect Storm Between 2014 and 2015: In $ terms, GDP Per Capita fell by 16.5% In the short-term, standard of living in a open economy is determined by: Terms of Trade Fell by 50% Labour Productivity Govt. Policies Exchange rate Per Capita GDP Growth falls by 50% Growth falls by 25% Growth falls by 25%

9 Between the Hard Rock & The Deep Sea - Stability Vs Growth; Stagflation - Fiscal Devaluation Vs Fiscal Revaluation - Consumption-led growth Vs Investment-led Growth

10 Stagflation: The CBN at a Cross Road GROWTH Slowing GDP/rising unemployment requires lowering MPR, LR, & CRR But could stoke inflation & banking liquidity STABILITY Internal balance: inflation (9.3%), External balance: foreign exchange (10% gap), external reserves ($30.4b) STAGFLATION With rising inflation & unemployment Monetary policy is complicated Monetary Independence USA Japan Canada China Bangladesh Saudi Arabia South Africa NIGERIA Financial Integration Exchange Rate Stability European Union JP Morgan Index Removal:! Blessing In Disguise In 2012, Nigerian bonds yield 16% Vs. 5.8% for GBI-EM. Speculative FPI made a killing: Reserves: nuclear weapons Versus gun powders Blessing in disguise. FDIs with long-term commitment. China and India are not on the GBI-EM Index. China deliberately pursued limits to foreign portfolio inflows and low interest rates. Malaysia & Iceland

11 Fiscal Devaluation Vs Fiscal Revaluation GROWTH Slowing GDP/rising unemployment requires Fiscal Revaluation But stability could be jeopardized STABILITY Internal balance: rising fiscal deficits (3.5%) External balance: rising current account deficits (3%) Fiscal Devaluation, but would constrain growth recovery STAGFLATION With rising inflation & unemployment Subsidy: To remove or Not Fiscal Policy Stance is also complicated N880 billion borrowed to finance budget deficit; 5% of budget spent on capital expenditure ; 20% for debt servicing. DMO restructure debts for 11 States with debt services burden reduced by 55% to 96%. TSA brings N1.2T to CBN; reduce brokerage fees. New Heads of FIRS, NPA, NNPC, Customs & Immigration. Replicate LASG Model : increased revenue 20-fold in 15 years.

12 Fiscal Devaluation & Revaluation Non-fiscal revenue is just 4.5% of non-oil GDP compared to 10-15% for other oil producers and 18% for BRICs and 35% for OECD Countries. Enhance tax administration reform: Increasing VAT rate to 10%, diversify its base & closing loopholes, VAT revenue could increase from $5.1bb to $18 bb or 1% of GDP to 3.5%. $40 Oil Price Benchmark & Zero-based budgeting for Total Revenue vs Tax Revenue (%GDP) Turkey Russia Brazil US China Mexico Philippines India Nigeria Revenue (% of GDP) Tax Revenue (% of GDP) Source: IMF /World Bank Revenue (%GDP) Turkey US China Philippines NIGERIA

13 Consumption-led Growth OR Investment-led Growth

14 Towards a Social Market P R O P E R I TY Economy P O V E R T Y

15 In the Long term, Standard of Living is determined by:

16 Incentives for Competitiveness Could add 3.5% to Growth Doing Business Ranking GDP, 2015 (Billion Dollars) NIGERIA SOUTH AFRICA Infrastructure Ranking (Out of 144 Countries) Corruption Perception Index Ranking (out of 175 States) Sources: IMF WEF, GCI EIU Forecast World Bank, Doing Bus. Report No. of University in Africa Top Stock Exchange (Market Cap., trillion dollars) FDI Inflow 2015 ((Billion Dollars) Institutions Ranking (Out of 144 Countries) Electricity Capacity (Million Kilowatts) Productivity (thousand dollars ppp per employees)

17 The Social Market Economy 1. Markets provide incentives for dynamic & creative economy via gainful exchange. 2. Markets are not selfcreating, self-regulating, self-stabilizing, or selflegitimizing. 3. In addition to Market stabilizing institutions (CBN & MoF & Macro-financial stability and fiscal sustainability), 4. Markets need other institutions & infrastructure that minimize transactions cost Market creating institutions (productive efficiency) Private ownership of production & Property rights & incentives (ownership) Rule of Law & Contract enforcement (compliance) Market regulating institutions (Regulatory Effectiveness) Regulatory institutions (anti-trust, safety issues) Coordination failures (industrial policies) Market legitimizing institutions (Inclusion, Equity & Participation) High Employment & equitable labour force participation Fair income & wealth distribution(targeted Social safety net programs) Political Democracy (Participation, elections, peace & security) Market networking infrastructure (Infrastructure Networks) Source: Danii Rodrik a physical (or virtual) marketplace to bring parties together (transport/communication)

18 Infrastructure Efficiency Infrastructure constraints cut 3.5% to 4% from GDP growth Financing via govt, private sector, capital market, pension 90 million people without access to grid electricity. Industry losses in excess of 50%. US$40bn required for new generation capacities (US$25bn for private sector assets and US$15.2bn public sector) US$11.4bn for upgrade of the transmission grid. US$1.73bn for distribution lines to connect 11.5million new households & US $2.07bn for off-grid access. Rail accounts for only 1% of transport, passenger traffic declined 93% (1980 & 2011) and freight 88% (1960 & 2011) US$69.6bn required for capital expenditure (US$41bn), maintenance (US$27bn), capacity building & technical studies (US$1.6bn); Only 24% of funding requirement is met. 18

19 Inclusive & Equitable Prosperity Address high poverty, misery index, inequality, & unemployment with Market Legitimizing Institutions Inclusive labour force can contribute 2.5% -3.5% to growth. High inequality with < 0.01% controlling a third of wealth Insecurity undermines physical and human capital Human capital development via vocational skills development Embark on a Marshall Plan for the North East Improve access of poor and vulnerable with social infrastructure. Social safety nets and conditional cash transfers. Partial financing of social infrastructure via grants & low interest loans from MDBs Source: World Bank

20 Financing Cost of Equity & Efficiency Programs Over $300 billion or N60trillion There is no free lunch. Equity Programs Naira Billion Social Inclusion Program 1. Social Welfare Program Unemployment Allowance 65 3.One Meal Per Day National Ident. Scheme Regional Growth Fund 300 Total 2,150 Education & Health 1. 6 Universities New Vocational Schools Special Education 6 4. World Class Hospital 500 Sub-Total National Health Exp./Yr 8,800 Total 9,462 Source: BuGGit Efficiency Programs Naira Billion Infrastructure 1.National Inf. Project 18,000 2 Electricity 5,400 3.Petroleum Refinery Environment 20 Total 23,520 National Mortgage Scheme 16, SMEs Loan Guarantee 10, Agric Commodity Trade Board 250 Total 10,250

21 Towards Inclusive Prosperity STAGE 1 INCLUSIVE PROSPERITY DIVERSIFICATION vs DE- INDUSTRALISATION STAGE 2 FACTOR-DRIVEN - Oil and Gas - Agriculture EFFICIENCY -Industry -Manufacturing - Mining INNOVATION- DRIVEN - Services STAGE 3 MARKET INCENTIVES & COMPETITIVENESS DEMOGRAPHY AND HUMAN CAPITAL INFRASTRUCTURE & CONNECTIVITY STAGE 4 INSTITUTIONAL EFFECTIVENESS

22 The Eagle Will Fly Again

23 Growth is Slowing Down 15% Oil Sector, Non-Oil Sector and GDP Growth ( ) 10% 5% 0% 5.5% 5.4% 6.1% 3.6% 6.5% 5.7% 6.6% 7.7% 4.1% 4.3% 2.5% 5.4% 6.2% 6.5% 6.2% 5.9% 4.0% 2.4% -5% -10% -15% -20% Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 Oil Sector Growth Non- Oil Sector Growth GDP Growth Manufacturing Sector Growth ( ) Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q Sources: NBS, CBN

24 APPENDICES

25 Stability Vs Growth Monetary & Exchange Rate Policy Face Trilemma 3 Options BUT 2 Possibilities Closed Financial Markets & Floating Exchange Rate - India - South Africa - Turkey 1 and 3 Closed Financial Markets & Pegged Exchange Rate - China - Bangladesh - Saudi Arabia 1 Monetary Independence 3 2 Exchange Rate Stability 1 and 2 Opened Financial Market & Floating Exchange Rate - USA - Japan - Canada 23 Financial Integration 2 and 3 Opened Financial Market & Pegged Exchange Rate - CFA Zone - Greece - Germany

26 Reserves as Gun Powder or Nuclear Weapon Countries Trilemma choices Closed Financial Market Open Financial Market Capital Control vs Reserves/GDP India Malaysia south africa Philippines China Argen1na Angola Indonesia Iraq Saudi Arabia Sweden UK Australia Nigeria Canada Russian Federa1on New Zealand US Mexico Brazil Kenya Turkey Japan Chile Denmark Peru Swithzerland Algeria Singapore Hong Kong Low Reserves High Reserves Source: IMF

27 Subsidy: To Remove or Not? " Nigeria does not consume 47 million litres of gasoline daily, contrary to NNPC records. Distribu#on is not equal to consump#on. In our es#ma#on, based on generator and automobile consump#on " Nigeria consumes between 20 to 24 million litres daily, while over 20 million litres finds its way into our neighbouring countries to take advantage of double profits (subsidy + arbitrage). " Subsidy removal will not stop diversion but it will cut it significantly. " Counter cyclical fiscal policies require immediate scaling up investments in social safety nets, condi#onal cash transfers, and public works employing direct labour.

28 Institutional Reforms & Effectiveness (Addressing market crea1ng & regulatory failures) Ins1tu1onal corrup1on cuts 3% from GDP growth " By some es#mates, out of oil revenue of $100pb, only $40pb is actual spending, while fraud and waste consume $60pb. " Strong An#- corrup#on stand " Public Assets Declara#on " Treasury Single Account " Ra#onalizing EFCC, ICPC " Reducing business transac#on costs " Hunt for looted $150 billion