Nigerians sketch ideas to overcome ‘temporary austerity’

“Austerity measures”. Nigerians are familiar with those words. They have grappled with austerity during past regimes. The first one was in 1982 when President Shehu Shagari announced a package to pep up government reserves and pay import bills.

Most imported essential commodities such as rice, milk, tomato puree, and drugs were rationed.

The preceding military regime of Olusegun Obasanjo, who held power after the death of Murtala Mohammed in 1976, had spent much of foreign reserves to build snaking flyovers, countless military barracks, and the then new federal capital it conceived, Abuja.

Mustard seed sown

By the time Obasanjo handed over power to Shagari in 1979, the political class did not see far and continued with the same extravagant spending. Corruption was rampant during the Second Republic: in the parliament, in ministries and agencies, among cabinet members, in the diplomatic missions, et cetera.

Corruption was the major reason Muhammadu Buhari overthrew Shagari.

The Shagari administration failed to stop pilfering from the public purse, then announced austerity measures, which led to public outcry and provoked the army to take over.

Shagari’s belt tightening measures could hardly be excused because up to 1982 when he announced it, Nigeria’s oil production was up to two million barrels a day (mbd), sold at $40 per barrel (pb).

Then the United States, which was Nigeria’s main oil buyer, started influencing Middle East politics to its advantage, especially in Saudi Arabia and Kuwait after the end of the Iran-Iraq war.

The monopoly of Oil Producing and Exporting Countries (OPEC) was curtailed as these American allies flooded the market with oil until the price came down to $13 pb, then to $11 between 1985 and 1987.

Mustard seed grows into a tree

The austerity measures Abuja announced recently are different from the Shagari variant. The man in the street may feel the pinch less.

Luke Uche, a newspaper vendor in Ojuelegba, Lagos said: “It is book people who understand it.” He still sells newspapers at the normal cover price and takes his commission.

Uche may be ignorant of the nuances of fiscal policy and engineering. Oil revenue has reduced, foreign reserves have tipped down, the naira has been devalued. Yet, everyday living goes on.

Perhaps the matter is so technical for the common man to appreciate. Or perhaps oil revenue shortfall has not started making an impact. Or government’s contingency fiscal plans to cushion it deflects the impact.

At least, one of these is playing out, which may be why consumer price indices have not witnessed any remarkable shift since the slide in oil revenue in August.

An economist, Ken Nwaneri, the Chief Executive Officer (CEO) of Business Solutions Integrated in Lagos, explained that “there ought to be no panic over decrease in foreign reserves. Idle money has no value. It only serves the purpose of borrowers.

“What nations worry about is domestic fundamentals and the ability of the domestic economy to finance development and growth to reflate the economy and service debts, both local and foreign. Otherwise, the hue and cry about the receding foreign reserves is of no consequence.

“You and I ought not to feel it unless the indicators at the home front do not give hope that the foreign reserves will be filled back again. But the scenarios here do not show that Nigeria is sliding. On the contrary, the economy will soon witness unprecedented expansion.

“All that is needed now is to tidy up sectoral regulatory frameworks, especially in the area of due diligence and enforcement, like ensuring zero-tax evasion, to get things going and quickly bridge the gap in revenue arising from the dwindling crude oil receipts.

“When all these are put in place, and vigorously implemented, Nigerians might not feel the austerity measure, at least not to the degree of hype being made about it.

“This one is not like 1980-83 austerity that brought down the Second Republic. This is because the size of the economy then was smaller than what is the case now and largely state-controlled with only oil as the chief source of government revenue.

“That was why the people felt the impact almost immediately, and the army capitalised on it and brought down that government.”

The government dubbed the 2015 fiscal year beginning in January an austerity year in spite of its N4.6 trillion budget because of anticipated continuous drop in oil revenue, which accounts for about 90 per cent of foreign exchange.

The U.S announced cut back on oil imports in June this year.

Back in 2003, after the end of Operation Desert Storm 2 which ousted Iraqi dictator, Saddam Hussein, the administration of George Bush began to purse an aggressive self-sustaining energy policy to lessen American dependence on oil supplies from the Middle East and Nigeria.

The administration of Barack Obama has continued with the policy. Oil companies are encouraged through tax cuts and direct financial support to explore in and outside American shores.

The result is a quantum number of acreage acquisitions on U.S. soil and in far flung places. There is production of shale gas from large swathes of Texas, New Mexico, Canada, and other hydro carbon bearing belts of North America.

Since March this year when the gradual cut back on oil import from Nigeria started, the price of benchmark Brent crude has been climbing down from a peak of $190 pb in January, nose-diving to about $70 in November.

Nigeria has revised the 2015 budget crude benchmark from $79 to $73 pb.

Shock like before

The world of OPEC, in which Nigeria is an active member, has a long history of oil price shocks. Each time it seemed things would go on endlessly well for the 13 members of the cartel, the U.S. would spoil the show.

In the 1970s, OPEC used its oil supply power to America to influence Washington’s policies in the Middle East, especially during the Iran-Iraq war and the Arab-Israel war.

As the wars thawed, U.S. energy firms increased search for oil fields in many parts of the world, outside the traditional Middle East suppliers like Saudi Arabia, Kuwait, Bahrain, Iran, and Iraq.

This led to more investment in African fields by American multinationals, which gradually became Nigeria’s major oil customers, importing at peak 70 per cent of Nigeria’s daily export.

Today, as the U.S. tries to cut back on foreign expeditions – the desert wars of the 1990s and 2003, democratisation of Eastern Europe in the 1990s, the rifts in Russia, Bosnia/Herzegovina, Czechs/Slovaks, Somalia, Rwanda, Sierra Leone, et cetera – it also trims dependence on foreign oil, hence the utilisation of shale oil.

U.S. oil giants have in the past five years been acquiring large yielding fields in Russia, Belarus, Canada, Tanzania, Ghana, and Togo.

Kyrian Okaraeke, an economist, said: “The Nigerian government has always known in due time our energy supply to the U.S. will decrease. The tell-tale signs have been there.

“That is why the government created such fiscal instruments as the Sovereign Wealth Investment Agency, the Excess Crude Account, and all these other non-oil intervention instruments. That is why the austerity so announced may not be harshly felt if the private sector does more business than politics.

“But as it is today, politics and acquisition of political power is the major concern of Nigeria’s rich class, as if one cannot operate a business profitably and create jobs without aspiring for political office.

“There are a lot of intervention mechanisms the present government has created, such that even if these taxes are increased as the government announced, it would not be so burdensome to the common man.

“But the tragedy is that here, only the poor people pay tax, while the rich ones use connection to evade tax. To me, that will be the greatest challenge of the austerity measure.”

How crude revenue affects MTEF

Nigeria’s developmental policies have in the past two years launched on what Finance Minister and Economy Coordinating Minister, Ngozi Okonjo-Iweala, dubbed the Medium, Term Expenditure Framework (MTEF).

Within the vagaries of fluctuating oil prices, receipts and expenditures, what Nigerians assume is that when the MTEF would have run its course in 2017, growth must have been achieved in infrastructure, the real sector, job creation, and government revenue windows.

The government has awarded contracts for infrastructure upgrade, some due for completion between 2017 and 2019, a year before 2020 when Nigeria hopes to become the 20th largest economy in the world.

However, the extent to which the current austerity measures, though not fully spelt out yet, will go is what keeps Nigerians in suspense.

Human rights activist, Emmanuel Onwubiko, said if Abuja expects to bridge oil revenue funding gap through tax increases, as announced by the National Economic Council (NEC), then the task is how it goes about it without stemming growth “because our tax system is already business unfriendly.”

Another concern is how to get officials in charge of mopping revenue for the government to be diligent at it.

“Media reports are replete with graft and extortion in government agencies in charge of its revenue generation, and our corruption agencies have not helped matters in this regard,” Onwubiko explained.

The oil economy has created the wrong impression about taxation, he added, saying a lot of luxury goods are consumed without being taxed.

Buffer

Abuja anticipated a fiscal hiccup from crude oil shortfall, and therefore had created intervention mechanisms to pep up the private sector.

There is no sector, from banks to insurance, agriculture, aviation, manufacturing, small and medium scale enterprises, oil and gas, to entertainment that has not witnessed some form of government bailout.

Chris Nwobo, an investment analyst, said the gesture “is supposed to make austerity measures less impacting. But the problem of electricity is often cited and this is where I suppose the government failed due intelligence.

“Most of those who bought the discos (power distribution companies) and gencos (power generation companies) are politicians in the name of local content. The government is not supposed to have sold all those strategic assets that touch on the economy to top local power brokers who are not genuine entrepreneurs in the electricity and energy matters.

“When you buy a business, you invest money in it and nurture it to profitability. But here, these so-called local investors want the government to use tax payer’s money to water everything for them as if they are going to share the profit with government.”

How Nigerians can cope

An auto merchant, Maxwell Mbonu, said: “Nigerians are used to austerity measures. There is nothing new about it. At worst, they will increase petrol price again.

“But the government can still avoid petrol price increase, but reduce the salary of those in government”.

Another trader, Cecelia Nwamaka, added that “the government will again try to increase the price of everything; like this my shop, the landlord will again try to increase the rent. Already I am paying N70,000 per year.

“Let the government give us water, electricity, and affordable houses before they bring austerity.”

Taiwo Kolawole, a textile merchant, argued that “the government is already collecting a lot of internal revenue through the VAT (value added tax) we pay. Maybe those collecting it are not remitting it to the government.”

She asked the government to cut the emolument of public officers, especially lawmakers.

An economics lecturer, Ralph Anosike, suggested “mopping up of dormant funds in the capital market and the pensions fund into fast yielding investments, especially road transport system.

“In an economy like ours, idle funds could be absorbed and invested into result yielding enterprises. The agribiz programme is such that requires a large pool of funds because it yields quick returns.”

How long austerity can stretch

Economic trends regarding consumer price behaviour sometimes defy conventional assumptions. In Nigeria, prices go up regardless of demand and supply logic. Even when prices sometimes come down, they do not return to previous levels.

That is the jig-saw that makes it difficult for people to notice the effort the government makes to improve things. This is caused by weak consumer protection mechanisms.

So how will Nigerians know that they have exited an austerity period? Perhaps only when the price of a certain good or service remains constant over a long period. However, economic analysts and rating agencies, local and global, agree that Abuja has gone far in its sectoral empowerment and regulatory reforms that the economic indices and consumer price index can be measured easily if the National Bureau of Statistics does its work.