Economy: The Way Forward

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TELL Cover Page

By Tunde Lemo


“Change” was a widely popularized mantra during the recent electioneering campaign that led to the incoming of the new administration at the Federal level. We were all fascinated with the experience of an incumbent president peacefully handing over to the opposition. Now, the excitement is over and we are beset with grim macroeconomic realities. Staring us in the face is a nation in need of deep economic surgery on many fronts.

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On many occasions, “Change” discussions have focused on the need for radical turnaround in governance at all levels, respect for the rights of the citizenry and progress in all areas of political life. We do not usually appreciate the precariousness of the underlying economic condition of the nation.   Sadly, the “change” frenzy left out the need to rescue an economy sprinting to a comatose.

At present, government revenue significantly comes from crude oil sales, a sign of excessive and unsustainable dependence on crude oil. One of the milder risks of this mono-product strategy was recently realized. Many state governments became insolvent as allocations from federal accounts dwindled on the back of reduced earnings from crude oil. While many developing countries have made progresses in their diversification efforts, the Nigerian story is very different. It was reported that as of 1960s, 80% of government revenues among developing countries came from commodities. As of today, 80% are from industrial goods.


Under the present model, government revenue is vulnerable to changes in the price of crude oil. Fluctuation in oil price is a reflection of unstable short- term interactions between crude oil supply and demand factors. More worrisome are the long term or permanent changes. Long term changes to the dynamics of crude oil demand and supply will completely alter the story of a country and its path to actualization of economic objectives. Technological developments are threats to future demand for crude oil. The shale oil revolution in the United States is an example of how technological innovations is changing global energy demand-supply dynamics. Since the breakthrough in ‘fracking’ technology, it was reported that innovation has been on the rise in shale oil industry as engineers continue to get even more production from smaller rigs.

Engineers have considered less fuel consumption as major progress that need to be made at industrial and domestic fronts. It is beginning to appear like the era of a barrel of crude oil selling over $100 is over and that global oil glut with a declining demand is the new normal. Crude oil price below $70 is usually seen as disastrous for oil dependent countries such as Nigeria.

The threats of changes to global oil economics landscape is a challenge that most economic policy makers and institutions in oil exporting countries are losing sleep over, thinking and rethinking diversification alternatives with the lowest cost on the economy. Apart from the long-run benefit of economic growth, diversification is needed more urgently in any country with rapid population growth (of which Nigeria is an example).

For Nigeria to witness the needed insulation from global shocks, macroeconomic progress, move towards full employment and restore the confidence of global investors in its markets, significant institutional and technical re-strategizing are needed. Policies must be geared towards production of wide range of economic output. Nigeria needs to break away from the common problem of least developed countries, commodity-dependency. Diversification is not often an easy route to take many times. Years of necessary investments in other areas are often met with huge political resistance. Nonetheless, the fact that many oil-rich countries are already plying the route shows it is plausible.


Oil and Gas Sector

It has been decades of missed opportunities and waste. Nigeria, with proven crude oil reserve of 36 billion barrels and 187 trillion cubic feet of gas (8th biggest in the world) cannot boast of much with the proceeds. The British Prime Minister, David Cameron at the 2013 World Economic Forum in Dallas, USA said, “Nigeria earned USD100 billion of oil revenue in 2012 – more than all the aid given to the entire sub-Saharan Africa”. Of course, it is now public knowledge that most of this proceeds was diverted in questionable swap deals and other corrupt practices.

Yet many oil-rich countries have taken advantage of these natural endowments to build infrastructure and secure the future of generations yet unborn. While others are regarded as oil rich, Nigeria should sadly be regarded as “an oil-poor country”. Our life of profligacy can be summarised in the words of the Swedish Economist, Marian Radetzki in 1992: “No sophistication is needed for the wise decision to deposit fast growing mineral income in the bank, pending the emergence of sensible opportunities to spend the money. On the other hand, even a financially sophisticated government can squander the public income if it is unwise or dishonest or not concerned with social and economic development”.

No doubt, we have wasted the past earnings, but my fear is that if we are not careful, we shall also waste future earnings through riotous lifestyle, funded by oil subsidy – IT IS LIKE SPENDING THE MONEY THAT WE DO NOT HAVE.

Removal Of oil Subsidy/ full Deregulation of Downstream Sector

Compelling argument has been made on oil- subsidy removal. The issue is not about whether or not it makes economic sense as sufficient case has been made. The main issue today is ideological.

The data below clearly shows that Nigeria is currently father charismas and we may be subsidising the entire West/Central Africa.


Country Petroleum price N Per Capita income
Nigeria 87 3,298
Cameroun 226 1,021
*Ghana 163 775
Chad Republic 156 788
Benin republic 202 598
Togo 205 437
Niger republic 187 302

* Ghana, with lower per Capital Income completed the removal of oil subsidy at the beginning of this year


From the data above, it is clear that if subsidy were being retained, it is not for the “common man” as the average citizens of other countries are not as rich as Nigerians. Even if you adjust for “Gini co-efficient” to take care of wide gap between the rich and the poor, it does not make sense. Nigeria today has the cheapest oil price after Saudi Arabia (N32), Kuwait (N44), Bahrain (N56), Qatar (N56), Oman (N62), Iran (N68) and Brunei (N76). Her price is currently at par with Ecuador.

According to the International Monetary Fund, IMF, “Energy subsidies are often regressive, overall with 80% of the total benefit accruing to the richest 40% of households. Fuel subsidies are a costly approach to protecting the poor due to substantial benefit leakage to higher income groups. In absolute terms, the top income quartile captures six times more in subsidies than the bottom”.

Kachikwu, the Petroleum Minister of State and GMD of NNPC recently revealed that Nigeria spent more than N5 trillion on fuel subsidy between 2006 and 2012 and subsidy accounted for 20% of the Federal Government budget in 2013. The current subsidy regime, estimated at N800m – N1trillion per annum is simply not sustainable and the benefit does not go to the common man. Besides, the savings can be better utilized to provide social and physical infrastructure that are pro-people, including the provision of free mid-day meal for students in the public schools.

The biggest advantage will be that the downstream sector when fully deregulated will attract investment from within and outside the country and therefore provide additional employment for services along the value-chain and reduce the strain on our foreign exchange. Currently about 32% of forex allocation goes into importation of petroleum products.

The Minister of State at the Senate screening in October had advised that the Petroleum Industry Bill (PIB) should be passed as non-passage is costing the country about USD15b annually. We may not have the details but I believe that the present structure of our exploration activities with International Oil Companies (IOC) which is skewed heavily in favour of production sharing as opposed to joint venture activities together with other uncertainties account for the huge losses.

In addition, the existing refineries, according to him have been operating at an average of 25% capacity (contrary to the earlier belief that they often operate at over 60%). The refineries should be sold to allow the private sector operate them more efficiently. Our experience in the cement Industry and Telecoms sector confirms that such activities are better left in the private hands and efficiency gained from competition and research and development will be passed on to the people.


Fiscal Sustainability

It is clear that the current debt burden of $61.5b is very unsustainable. Our total debt (external and domestic) in 2004 was far below the current figure of USD63.8b (External debt then was USD36b before the debt relief which wiped off over USD30b, mainly Paris Club debts). While we have been moderate on external debt, we have since 2007 had recourse to domestic borrowing to finance our burgeoning recurrent expenditure. We may argue that our Debt/GDP ratio (currently about 11%) is still moderate when compared with South Africa (40%), Brazil (65%), India (67%), and USA (109%).

I make bold to say that the bulk of our economy is still subsistence agriculture and petty trading and since the players are largely peasants and people below poverty line, they are not taxable. This therefore, does not give much headroom for the expansion of tax bracket to service heavy debt burden.

The picture is more worrisome at state level. In my view, only three states are viable today, namely Lagos, Rivers and Delta State. The litmus test is that if IGR is insufficient to run a state, at least meet recurrent expenditure, that state is unviable. Governor Okowa of Delta State was recently quoted as saying that N10b CBN’s bailout money is not sufficient to meet the states over N30b pension obligation, talk less of salary arrears. Kaduna state generated only N12.8b IGR in 2014. This can only pay average monthly salary of N10,667 to its teeming 100,000 civil servants and teachers

Today, Federal and State Governments spend over 75% of their revenue (including borrowed funds) on recurrent expenditure with the crude oil price still trending south (Expert forecast that crude oil price may drop to USD20/ barrel by 2020) with no sign of recovery and having drawn almost fully our excess crude savings (USD2.25b as at Oct 15, 2015) we may be heading for worse days.

My recommendation is FISCAL CONSOLIDATION. We must address this as a country before we all get consumed, by our lust. In 1960, just one Regional minister for works was responsible for works related activities from Igbetti, to Asaba, from Ifon to Badagry. Today, we have about 16 commissioners occupying the same office (Lagos recently swore in 32 commissioners and 14 Special Advisers), each having perks as much as twice the perks of the regional minister in real terms. (The geographical expression called Western Region has been split to 8 states with at least twice the number of ministries). The result is that whereas they spent at most 20% on recurrent expenditure and 80% on capital expenditure, there is a complete reversal today in favour of recurrent expenditure. We should amend the constitution and adopt the six geo-political zones as our “New States”, or revert to the 1967 12 states structure or 1976 19-state structure. This is the only way we can be able to save scarce resources for the much-needed provision of social amenities. We better take the advice now by ourselves otherwise the experience of Greece is knocking and may be worse in Nigeria because of the geo-political structure, level of poverty and religious intolerance.

At the Federal level, Mr President has set the right tone for fiscal consolidation through his public comments as well as the constitution of Ahmed Joda Committee. The committee’s recommendation should be considered along with Orasanye’s recommendation for the merger of Ministries Departments and Agencies (MDAs, currently over 700) that have over-lapping functions. Examples are EFCC and ICPC, Federal Ministry of Agriculture and Federal Ministry of Water Resources, etc.

The size of our Embassies and Foreign Missions is too large for the size of our economy. Apart from our major trading partners, and given other military, historical and diplomatic considerations, we should review the present structure and reduce our embassies drastically.

Global Competitiveness.

The World Bank Global Competiveness Index (GCI) ranking of Nigeria in 2015 is 169 out of 189 from 95 about 10 years ago in spite of its large market, relatively efficient labour market. No thanks to the current insecurity kidnapping and Boko Haram, but also because of lack of sufficient property right protection, corruption and undue influence. It is a shame that Nigeria is far below Singapore (second only to Switzerland, the global best) a city-state tiny south East Asian country that got independence after Nigeria, Mauritius- Africa Champion (32), South Africa (73) and Rwanda (62), Botswana (72).

To address Nigeria’s competitiveness, let me take the Textile industry as a case study. Just after independence, a large number of textile companies relocated to Nigeria and could be found in their clusters: Lagos/ Ogba axis, Kaduna, Kano etc. By early eighties, there were over 120 textile companies in Nigeria. Largely owned by Indians and Chinese. Their reasons for relocating to Nigeria were apparent: our teeming population, abundant labour, electricity, road and other infrastructure superior to India and China. Thus it was cheaper to produce in Nigeria than it was in India and China. The reverse is the case today. India and China have fixed their infrastructure while we ran down our own. The result is the closure of over 80% of these factories and have since been relocated to their home countries because we lost out in competitiveness. The same can be said about other sectors of the economy. The result is capital flight, high unemployment, loss of tax revenue etc.

To deal with competitiveness, we have to review our laws and simplify registration, approval processes, certificates of occupancy should be simplified and issued within one week. We should abolish multiple taxes and stop the menace of Local government touts who extort money from transporters. We should review our trade laws and grant necessary concessions. The pioneer status should be issued where desirable to labour intensive companies with clear evidence of generation of jobs.

To increase our competitiveness, we should invest more in generating electricity. Daily blackout still very prevalent in spite of privatisation of 2013. We still struggle with generation of 5000MW, approximately 30% of our maximum manpower demand.

I must say here that very soon the binding constraint will be gas supply. Gas supply at reasonable price is very important to the power sector. We must therefore look at the gas-to-power linkages and see how to streamline the processes for effective co-ordination as about 80% of our power plant are thermal and gas dependent. We need to provide adequate funding for gas sector infrastructure. There is also the need to address the pricing of gas and deregulate to attract private investment. Currently, investment in the power sector far exceeds the investment in gas field development.


  • Management of the Foreign Exchange

The sharp drop in the price of crude oil to the present level of USD48 per barrel is no doubt a clear signal that if care is not taken in the management of the foreign exchange, we could run down our reserve in less than no time. The present reserve level of about USD30b is barely sufficient to finance 5-6 months of import.

The Central Bank of Nigeria, empowered by its law to maintain external reserve appropriate for the economy, but shall also protect the value of the Nigerian currency. Many circulars and memoranda have been issued by the CBN and the most controversial being the circular issued on June 23 and 24, 2015 excluding the importation of 41 items from accessing the foreign exchange market. The effect of this administrative control as well as other controls is the widening of the official/parallel market by over N30 or 15%, thus making Nigeria one of the countries IMF refers to as adopting “Multiple foreign exchange practices”. The effect includes the following:


  1. Sharp reduction in foreign exchange flow to Nigeria


  1. Capital flight and suspension/cancellation of existing trade finance line by foreign banks. Information from Nigerian banks, the guarantors of most of the foreign lines disclose that their counterparts abroad are owed about USD4b


  1. Opening of arbitrage opportunities

Most of the existing Bureaux De Change (BDCs) are making illegal profits on the amount allocated to them weekly. The BDCs are supplied with subsidized forex at the expense of the real sector of the economy, but these allocations are often sold at the parallel market rates.


  1. Delisting of Nigerian bonds from J.P Morgan’s Government Bonds Index for emerging markets (GBI- EM)


  1. Standard & Poor rating downgrade. The International Monetary Funds (IMF) in its April 2015 Regional Economic Outlook report on sub- Saharan Africa noted that further currency depreciation in Nigeria and 7 other oil exporting countries was crucial.


  1. Manufacturers began to experience difficulties in opening letters of credit. This has seriously affected the capacity utilization and GDP growth plummeted to a historic low of 2.34% in Q2 of 2015, the least since 1999.

Mr President himself noted these difficulties in his interview on September 15, 2015. When he promised that “the CBN will make modifications to the restricted items in order to ensure availability of foreign exchange for industries, spare parts, essential services and raw materials”.

My recommendation is that further depreciation of the Naira is inevitable. All major commodity (crude-oil) exporting countries’ currencies have depreciated against the USD dollars including Russia Ruble, and Brazilian Reals have depreciated by between 30-40% in the last 1 year. If we apply the same on the Naira, official exchange rate should now be between N221 and N238. The only way to calm down the market is to allow market forces to fix the rate while we then embark on other mid- to long term measures to ensure appreciation of the exchange rate, albeit in an organised manner. Some of the measures include:

  1. Diversification of the economy… this is a long term measure as I stated before


  1. Aggressive investment in Agriculture to ensure self-sufficiency in the local production of rice (we consume about 5 million metric ton per annum). Sugar and other staples. We could save up to 30% on importation of these items per annum.



  1. Promote private sector investment in the downstream petroleum sector, including local refineries. This can only be done through the removal of petroleum subsidy. Importation of petroleum products currently gulps 30-33% of forex allocation of CBN.


  1. More aggressive support of export related activities, with special focus on small and medium Enterprises (see my comments on access to credit). We should ensure that the Nigeria Export Import Bank(NEXIM) and Bank Of Industry (BIO) sponsor our National Champions to take advantage of the America Opportunities And Growth Act (AGOA) and other bilateral and multilateral Trade Protocols to Stimulate our export activities.

The present policy punishes the exporters as they are compelled to sell their export proceeds at the subsidized official rates while their local costs have reflected the parallel market.

  1. Further depreciation will put additional cash in the hands of Federal and State Governments to either reduce their deficit or assist in financing social amenities.


Access to Credit

This has been the major headwind for the necessary economic growth in Nigeria. A cursory look at the books of the banks confirms that the critical sectors of the economy that can help to power double-digit growth in the next decade or two are not receiving adequate support from the banking industry.


SECTOR % of GDP % of Bank Credit
Agriculture 17.8% 3.9%
SMEs 20% (Estimated) 0.9%

Source: Central Bank of Nigeria

Agriculture and SMEs account for 50% of employment and contribute approximately 38% of the GDP. Yet the two sectors attract 4.8% of bank credits. We should commend the Lamido Sanusi led CBN for the bold initiative that helped to raise lending to Agriculture sector. Prior to his reign at the CBN, lending to the sector was just a paltry 1%. The reason for the paltry support are not far-fetched. According to the banks’ underwriting rules, these sectors are high risk and in most cases may not have the collateral to support borrowing. Where the risk-adjusted lending is done, the interest rate is prohibitive.

There should be direct government intervention to address the following to unlock the potentials of these sectors:

  1. Bank of Industry (already doing very well of late), as well as Nigeria Export-Import Bank – NEXIM, should be recapitalised and made more functional to support these sectors. We should borrow a leaf from Brazil where the Brazilian Development Bank (BNDES), equivalent of Nigeria’s Bank of Industry, BOI, with robust capitalisation impacts the Brazilian economy with significant much better support to the SMEs and agriculture. In the first half of 2015, BNDES had disbursed total loans of USD 19.5bn (about N3.9 trillion). When this is annualised, a total disbursement of N7.8 trillion is more than the size of the combined budget of both Federal and State Governments in Nigeria.


  1. Even if interest rate is moderated, it is doubtful that the entire Nigerian banking system can mobilise that level of credit in one year. Nigerian banks should increase their penetration and mobilise additional savings, especially through the informal sector. National savings rate of 18.7% of GDP is still low when compared to India (31%) and China (50%). A good blend of the banks deposit portfolio should help to moderate the existing high lending rate.


Unemployment/ Job Creation

National Bureau of Statistics gave unemployment record recently of 8.2% at the end of June 2015. This is higher than the 7.5% recorded in the Q1 2015. Based on the old computation of unemployment, the rate could be high as 30%. At the recent passing out parade of the NYSC, it was revealed that over 45% of 250,000 corp members join already congested labour market yearly. My fear is that there may be a very serious unrest in future if nothing is done to stem this tide.

The growth that has been experienced in the last two decade has not been inclusive because the sectors that recorded growth are not labour intensive, but technology driven. Government should give incentives to the establishment and expansion of labour-intensive commercial activities. Such incentives should include tax holidays etc.

Government should consider without delay the establishment of a Bureau for the unemployed. Organise them as a group and pay between N10,000 and N15,000/ monthly allowance. They should be made to render volunteer services and through bio-metrics, we can ensure that abuses are eliminated.

Poverty and unemployment in my view may have contributed to the existing security challenges currently being experienced across the country, especially Boko Haram insurgency in the North-East, cattle rustling in other parts of the North as well as kidnapping and pipeline vandalizing in the South.


Ogun State was created along with six other state on February 6th, 1976. By Gen Murtala Mohammed, one week before his assignation. The State took off with high hopes and therefore proved the pundits wrong who had mischievously cracked this age-long adage ”Enito soko leko, o bale ni Ibadan, won ni Abeokuta nko, o ni ki won fo’’ – meaning, A stone was thrown in Lagos and landed in Ibadan, a question was asked about Abeokuta and the response was ”inconsequential.”


With total land mass of about 16,409 sq. kms (Just 1.8% of Nigeria by land mass, and 3.5% of Nigeria by population) is no doubt a great state. The cradle of western civilization in Nigeria, recording first in many things: newspaper: Iwe Iroyin was established by Henry Townsed in 1859, Egba United Government, then recognised by the British Government in the Pre-colonial days, Very rich historical monuments including Olumo Rock, 1st Church in Nigeria, Bilikisu Shugbon site etc. Abundant in mineral resources including limestone, gymson, tar gravel, high quality stone, phosphate, bitumen and evidence of crude oil deposit.

If the diversification of the Nigerian economy should start, Ogun state should take the lead. The quick win should include support for local economy including Adire and the granite industry which can support rapid development of the physical infrastructure around the South West. Ogun State should leverage on the proximity to Lagos, the nation’s economic hub for rapid development. The states of Maryland and Virginia in the USA did same and today they have been integrated as what we now know as the Washington Area. The major airport in DC….. Dulles Airport is actually in Mary land State.

Let me at this juncture commend Ogun State under our hardworking Governor, Senator Ibikunle Amosun FCA, CON for the transformation of the state, especially in the area of provision of infrastructure. This will go far in attracting the much needed investment to Ogun State. Before long, businesses will naturally be attracted to Abeokuta and environ because of friendly policies of the State Government

I recommend the establishment of a joint Lagos/ Ogun Development commission to embark on projects that will be of mutual benefit including the following:

  1. Completion of Olokola Deep Sea Terminal. This project has been in the pipeline for too long and there is need to fast-forward the completion, especially since Lagos and Ogun are now under the ruling APC, using the PPP model
  2. Construction of a light rail between Lagos and Abeokuta, to cut through Ofada axis. This should open up the residential area within Ibafo/Mowe/ Asese/ Orile-imo corridor. Ogun State Government should halt the hap-hazard development along this corridor and plan well laid out residential estate that will help to support the teeming Lagos population, which currently suffers 2 million units of housing deficit. If well planned, a middle class worker will prefer to live in my village at Sofolu, commute on train (stress free) for one hour to Lagos where his office is.
  3. The industrial cluster already developing along the Flourgate area of Ogun State should be well planned and Ogun State should adopt Dubai model to ensure the original land owners are not short-changed in the new arrangement. Land should be on lease to companies and land owners should be accommodated in the shareholding structure of the companies
  4. There should be an Economic Summit in Ogun specifically on the mineral resources in Ogun State. The summit can be sponsored by Dangote Cement/Lafarge and others already operating in Ogun State. The state should target key global players in solid minerals from Australia, South Africa and other leading solid mineral rich countries.
  5. Muritala Mohammed Airport in Ikeja is already over-stretched and may be unable to serve as an effective African hub and compete with Dubai or Kuala Lumpor Airport. I believe Ogun State can start early by earmarking land for future development of a 2 – runway, 4 terminal international Airport that can be made ready by the year 2020. If well packaged, the airport can be self-funding with little or no Government funding. The USD12 billion Heathrow terminal 5 is a good case in point.



Nigeria is no doubt experiencing a very tough economic climate. The slowdown in the global economy on the back of sharp drop in crude-oil prices as well as continued slow-down in the economies of China and other major economies have exacerbated the problem in Nigeria.

We must take very hard, bold and perhaps unpopular decisions to deal with the structural socio-political and economic problems. Now that elections are over, we must close ranks and deal with the problems today, otherwise, like cancer, the consequences of delay may be too costly for this and future generations. Like the children of Issachar – we must understand the time and the season and know what should be done.

Lemo, former deputy governor of the Central Bank of Nigeria, CBN, presented this paper at the Sobo Sowemimo Annual Lecture 2015 organised by Abeokuta Club last November.


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