Sowing Seeds of Sustained Prosperity Kaduna State Government Outlook of the Nigerian Economy Kemi Adeosun Honourable Minister of Finance Presentation to the LBS Breakfast Forum, April 9 TH, 2016
Nigeria s economy is rebuilding from a trough DECLINING GDP GROWTH WITH INCREASING LEVELS OF UNPRODUCTIVE DEBT Significant drop between 2005 & 2006 driven by debt forgiveness Debt levels rose at ~16% CAGR between 2008 and 2015 Source: World Bank, 2015 GDP (World Bank Estimate), Debt Management Office (DMO) 2 2
That trough has had tough implications for the economy Investment return on government spend has been sub-optimal, with negative knock on effects on company operating spend and capital formation 1 Continued high cost of infrastructure, weak regulatory institutions, and poor ease of doing business are a brake on growth 2 Corporations have therefore seen their revenues and profitability come under significant pressure, reducing their willingness to employ or take investment risks; job losses have followed 3 In real terms, household per capita income has been under pressure in the past 24-36 months, causing a drag on aggregate demand 4 The net effect is a slow down in overall growth, capital formation, employment, and household well being 3 3
To unlock Nigeria s full potential, our reform strategy needs to solve for both historic and current challenges WEAK FISCAL DISCIPLINE HOBBLING CORRUPTION A B C BARRIERS TO GROWTH Goal Address fiscal deficit through new sources of revenue and strategic deficit financing Eliminate corruption through systemic changes to government finances Drive growth in near-term and lay foundation for long-term growth Select Key Actions Grow non-oil revenue base of the FG Increase expenditure efficiency by reducing and rationalizing recurrent expenditure Identify strategic sources of funds and rebalance loan portfolio Centralize collections and eliminate leakages through Treasury Single Account Drive increased recoveries from the MDAs by instituting an efficiency unit Increase capital expenditure to lay the foundation for long-term future growth Expand government spending to plug deficit in aggregate demand in the shortterm We will discuss each reform theme in more detail and the steps required 4 4
A Fiscal stability is being advanced by working to diversify Nigeria s non-oil earnings by 87% FOCUSED DRIVE TO INCREASE FG NON-OIL REVENUE KEY LEVERS AND INITIATIVES DRIVING GROWTH 87% growth to be driven largely by independent revenue and recoveries Federation account levies Other revenue Tailored MDA Revenue Strategy Improved Efficiency of Tax Collections Enabling Customs Collections Strengthening of Controls 5
A Steps are also being taken to reduce the cost side of government i.e. by reducing recurrent expenditure Personnel Initiative IPPIS Continuous Audit Objective Rationalise personnel expenditure Periodic certification of salary and pension payroll Payroll fraud investigations Overhead Efficiency Unit Rationalise overhead expenditure Budgeting & Reporting IPSAS GIFMIS Enhanced transparency of reporting Greater oversight and transparency of budgeting Controls TSA Improved treasury management Facilitate enforcement of Fiscal Responsibility Act (FRA) 6 6
Billion Naira A NNPC, for example, has used some of these principles to improve its 4 th 2015 quarter financial performance MONTHLY NNPC GROUP SURPLUS/DEFICIT 2015 20 10 7.65 0 (10) (20) (30) (40) (37.38) (12.67) (18.68) (32.93) (36.96) (21.19) (30.12) (12.22) (14.29) (11.86) (50) (60) (46.49) Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Notes NNPC Group deficit has drastically reduced in the last quarter of 2015 due to reduced leakages in operations This was achieved through the implementation of various reforms such as the cancellation of sub-optimal contracts, initiation of open and more transparent bidding processes and adoption of direct sales- direct purchase contract Models Break-Even point in NNPC s flow position expected by end 2016 7 7
A Finally, reductions in the cost and composition of government financing will also drive savings Projected budget deficit of N2.2trn in 2016 (2.2% of GDP) N1.8trn borrowing to be structured to achieve cost effectiveness and acceptable debt sustainability ratios: - $4-5B to be raised from multiple external sources including multilateral agencies and export credit agencies - Additional funds to be raised from international capital markets - Balance of funds to be raised in domestic market Refinancing of short-term obligations into longer-tenure instruments Use earnings from revenue-generating projects that are debt financed to service debt 8 8
A resulting in a rebalance of Nigeria s loan portfolio FROM HIGH PROPORTION OF DOMESTIC DEBT STOCK TO OPTIMAL EXTERNAL/DOMESTIC DEBT MIX FROM SIGNIFICANT SHORT-TERM REFINANCING RISK TO EXTENDED MATURITY PROFILE OF DEBT PORTFOLIO 9 9
B New procurement rules and capture rules for Federal revenues is key to reducing the ease of corruption TSA SYSTEM IMPLEMENTED The TSA account implemented in 2015 has yielded strong results EFFICIENCY UNIT ON TRACK Efficiency Unit started in 2015 has also made important strides - Consolidation of Federal revenues into transparent accounts - Reduction in leakages and rent seeking behaviour - Visibility into actual financial position of the FGN and therefore improving odds of a balanced budget - Improved capacity to track all subaccounts at CBN for federal institutions - Full impact will unfold in 2016 2018 as discipline and transparency reduces waste, and need for deficit financing - Reduced procurement opaqueness within FGN - Providing cost savings guidelines to the government - Additional innovations will be unfolded in next few months e.g. Online procurement system for travel, basic goods and other services using vetted suppliers and a clear accounting / approval system 10 10
C Nigeria will target increased capital spending to drive long-term growth KEY ACTIONS EXPECTED OUTCOMES FG expenditure on infrastructure to increase to 30% of total expenditure - Up from 10% in 2015 N1.8trn to be invested: - Transport, Roads, Housing, Power, Health Selective use of private capital through PPPs Substantial increase in gross capital formation Enablement of industrialization and increased business competitiveness Acceleration of GDP growth towards recent average (6%) Job, wealth creation and rise in household / capita income 11 11
C Ethiopia s recent strong economic performance was driven by a similar strategic rationale and tool kit AN INCREASE IN ITS GROSS FIXED CAPITAL FORMATION LED TO THE EVOLUTION OF ITS GDP Source: World Bank, World Development Indicators 12 12
Beyond these 3 themes, the Administration is also pursuing a number of reinforcing economic initiatives Greater coordination of fiscal and monetary policy to achieve non-inflationary growth Improving the ease of doing business e.g. regulatory reforms to lower cost of doing business, remove archaic laws from the books, and strengthen federal oversight institutions to become more pro-growth Specific policy initiatives to catalyse Medium, Small and Micro Enterprise (MSME) growth (c.50% of GDP) - Tax harmonisation and incentives - Inclusivity through increase in share of business awarded to MSMEs from government 13 13
These actions are expected to generate specific outcomes and upside for Nigeria s economic growth 1 Real GDP growth rate of 4.2% in 2017 and trending higher 2 Infrastructure development to drive economic growth 3 Diversification of economy and growth of non-oil sector 4 Improvement in overall business environment 5 Improvement in key socio-economic indicators 14 14
And further strengthen Nigeria s resilience versus other African oil producers even as it diversifies further Nigeria Angola Gabon Current Rating B+ / STA B / STA B / STA Economic Diversification Supports Continued Growth: The oil sector accounts for 10.3% of GDP, roughly a third of the oil exposure of Angola and Gabon 2015 GDP growth (%) 3.3% 3.5% 3.5% Oil % Total GDP 10.3% 35.6% 31.6% Oil Production mboepd 2.2 1.7 0.2 Forecast Fiscal Deficit 2015 (% GDP) 1.6% 7.0% 2.3% GG Debt Stock (% GDP) 13.2% 42.2% 43.0% Fiscal Revenue Relatively More Insulated than Peers: Non-oil revenue are forecast to comprise over 70% of total FGN revenue in 2016, following revenue diversification efforts. As a result Nigeria is able to control its fiscal deficit to a greater degree, despite spending pressures Greater Fiscal Flexibility: Furthermore, Nigeria s low indebtedness increases financial flexibility during a tighter fiscal environment with very limited debt distress risks. Debt is just a third of that of Angola or Gabon Oil Exports (% Total Exports) ~90% ~95% ~80% Approx. import cover (in months) 6.7 6.0 4.9 Assets of SWFs (USD bn) 3.7 1 5.0 0.4 Buffers in Place: FX Reserves cover 6.7 months of imports, higher than peers. Nigeria s sovereign wealth fund with an initial endowment of USD 1.55 billion combined with the ECA balance provide buffers of USD3.7bn. Although the Nigerian SWF remains smaller than Angola s SWF, it provides an avenue for a long term buffer to volatile oil prices Source: Angola: Bloomberg, IMF; Gabon: Bloomberg, IMF, BP; Nigeria: NBS; Government sources, IMF and SWF Institute. Includes ECA Balance at end 2015 15 15
In conclusion, Nigeria is returning to growth driven by the clear decisions to unlock her full potential Nigeria has faced a tough economic landscape in the past 24 months but we believe that toughest period is behind us even as we learn and recalibrate policy choices -Efforts made thus far have helped Nigeria remain more stable than other oil producers Be that as it may, unlocking full potential is our policy goal and that means putting the economy on a path to upper teens growth (8% - 12%) by 2018 In the near term, growth will be catalysed by 3 factors: -Boosting the quality and scope of government infrastructure and related spend -Removing the opportunity and incentive for corruption -Rebalancing government finances to stabilize the fiscal picture Growth will also be enabled by other measures being taken in concert with the Central Bank and key MDAs to lower the cost of doing business, improve sector level attractiveness, strengthen regulatory institutions, drive import substitution and boost SMEs The outcome will be an economy positioned for self-reinforcing recovery, a rise in private capital formation as investors commit to Nigeria, culminating in a return to shared prosperity by 2017-2018 16 16
Thank You