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Nigeria needs to cut discretionary spending 06 Oct 2015

A little over two years ago, I wrote an article in the June 2013 edition of this publication which I entitled, “Before Nigeria becomes Greece.” The article was about the possible impact of a fall in crude oil prices and how it might affect Nigeria's finances. At the time, oil prices were trending at $100 per barrel and it seemed the only way to go was up. As a matter of fact, in July 2013, oil prices reached $115 per barrel. The article has turned out to be prescient.

A couple of scenarios that I painted viz falling demands from traditional buyers of Nigeria's crude oil, and a drastic fall in price to $45 per barrel, have occurred. I posited then that Nigeria's budget deficit could grow as a result of a drop in revenue and the government would resort to borrowing, and borrowing costs would rise in tandem with the downgrade of the country's sovereign rating by international rating agencies.

The fulfilment of those ominous prophecies came with the decision of the United States of America, then the largest buyer of Nigeria's crude oil, to discontinue the purchase of oil from Nigeria. India is now the largest buyer of Nigeria's oil, with an average purchase of 367 barrels per day in 2014. Oil revenue shocks have hit Nigeria as several states have been unable to pay wages with attendant protests across the states.

As I watched the debt crisis in Greece unfold, I simply imagined that if I were the Greek Finance Minister, I would put a word of advice to Nigeria's economic managers, hoping Nigeria would never have to face the then looming Greek situation.

This purported advice might actually come handy now that low oil prices have become a reality with the implication for reduced discretionary spending. To navigate this economic climate, Nigeria would need to have short-term and long-term strategies.

In the short term, the country would do well to avoid retaining 900 federal ministries, departments and agencies, with the retinue of Ministers, Permanent Secretaries, CEOs, Directors, and the accompanying running costs. Even if we actually needed 27 ministries at the federal level, should we necessarily maintain the same number at the state level? This would mean a whopping 972 Commissioners, 972 Permanent Secretaries and at least four times that number as Directors. What about the Parastatals and Agencies? Do we require over 500 of them with their CEOs, Chairmen and Directors all funded from a lean government purse? Let's not talk about the pecks that are associated with these offices. In the end, we cannot afford to run a public service that consumes nearly 70 per cent of government revenue.

As I said before, we need to expand our tax base. The big task before the government of President Muhammadu Buhari is to capture as many people in the tax net as possible. Greece did it to the implosion of its economy and disapproval of its creditors, but Nigeria can't condone tax avoidance much longer. If we do, we will not be able to weather the economic storms. As oil prices have fallen internationally, we should have a tax base to fall back on. We must look for ways to tax both directly and indirectly. We need to focus on growing the private sector and the productive base, so that when these companies and individuals thrive, the government makes more money through increased tax revenues.

We must borrow only for projects that can generate future income or have multiplier social effects. Debt is Greece's major undoing. It always believed it could refinance, especially when the financial markets were buoyant. If the country had tied a major part of its debt to specific projects, Greece might have been able to salvage its situation.

In the long term, we might also need to start thinking about designing a new model of government that does not require the large number of lawmakers both at the federal and state levels. Clearly, the current structure is not sustainable. As a country, we need to begin to measure the social and financial returns these number of MDAs and legislators actually deliver. We need to measure the performances of these government bodies to determine how valuable they are. Where do we see government service delivery over the next five years, and how do we measure this? This will ultimately determine the number of agencies and the associated costs we can maintain.

Also in the long term, we need to find additional sources of revenue that are not tied to primary/natural resources, whose prices are way beyond our control. This means we need to add value to our natural resources. That is the only way we can command above-market prices for our products and services.

We also need to focus intently on small businesses. We need to turn Nigeria into an Enterprise/Start up Nation, where it's easy to start and grow businesses. We must make the environment more conducive for start-ups. That will strengthen the moral basis for demanding taxes and levies. I recall a small business owner telling me that she got a generating set for her business because of the power situation in the country. She was shocked when she was told to pay generator or emissions tax subsequently!  That's the current situation where regulatory authorities have become revenue generating authorities instead of business enablers.

We must also do all we can to make our country globally competitive. The Greek government was confident that tourists would always come to Greece. It felt that industries would always love to locate their operations in Greece. Investment dollars are scarce commodities; Greece forgot they will always gravitate to the countries that offer them a good investment climate.

We must also focus on building our educational system. This is what guarantees future competitiveness. We need an educational system that produces innovative, entrepreneurial and forward-thinking individuals. The system must be built on the values of hard work, intellect and integrity. As Africa's largest economy, we need to build a culture of innovation and enterprise – one that ensures we are at the forefront of new kinds of technologies and production techniques. Currently we have conceded such enterprise and innovation to countries like Kenya and South Africa.

Finally, we must focus on strengthening public institutions and fighting corruption. Thankfully, we have a government that is putting in place a system that ensures reforms are sustained, and institutions are rid of pervasive corruption.

We have not gotten to the point of experiencing the Greece-like crisis, where they had months of internal political battles, riots in the street at some point, citizens committing suicide as other nations dictated to them, because of the mismanagement of their economy.

The fall in oil prices, while detrimental to Nigeria's finances, gives us an opportunity as a Nation to have these difficult conversations about our discretionary spending and look to change the business model of Nigeria, such that we can begin to generate revenues and foreign exchange from sources outside the traditional crude oil.