Policy and Economic Review

Countries all over the world, developed, developing and under-developed are faced with a downward economic spiral. Those who are not yet officially in recession (meaning a contraction in economic activity) are faced with a slowdown in the rate of growth in their gross domestic product (GDP). Whether recession or slowdown, both result in higher unemployment, corporate and individual bankruptcies and loss of consumer and producer confidence. Policy makers everywhere recognise that deliberate policy and action is required to stem or reverse such a downward spiral otherwise economic activity declines further as more unemployment means lower demand, and then less production, and more bankruptcies etc in a vicious cycle.

That is why President Barack Obama has passed a $787billion stimulus bill (The American Reconstruction and Recovery Act) to invest in public infrastructure and generate jobs and economic activity which would otherwise not be generated by the private sector. China which is not in recession, but whose growth rate has declined from 13% to 6% has enacted their own $586billion infrastructure package based on the same thinking. Governments across Europe are doing the same thing. The question is how will Nigeria act to ensure that the envisaged slowdown in growth from around 7.5 per cent in 2008 to a projection of around 4 per cent in 2009 does not become worse in 2010 if global adverse conditions do not abate?

There is no clear strategy on the table in this regard. Instead the President’s advisers are worried that the 2009 budget as passed by the National Assembly is unsustainable. I disagree! As passed, the 2009 budget contains a deficit of 3.02 percent with the President warning that if oil production declines to an average of 1.6million barrels per day, the deficit will increase to 5.24 per cent. What the president’s advisers did not tell him or Nigerians is the comparable level of deficit in countries across the world all of whom like us adopt a target of 3 per cent maximum deficit as a percentage of GDP. In the US, the percentage is 12 per cent! In other countries the same trend is in play-Britain-7.2% and France-5.5% are some examples according to the Economist. The US budget deficit is exclusive of the stimulus package earlier referred to!

The point is, it doesn’t make sense in a recessionary environment to simply tout extant technical rules about deficits when everyone ought to recognise the dramatic and unique circumstances in which the country finds itself. The other point of course is, what is the percentage of government spending as a percentage of GDP? In all these developed countries, the percentage is rising-US projected to be 39.9% in 2010; while the Eurozone is similarly projected at 47.1% in the same year; In France, Britain and Germany, the figures are 52%, 45% and 44% respectively. In Nigeria, the figure by my calculations and projections is around 12.86% which negates the alarm over government spending. The scare is even less credible considering that while the US for instance is borrowing from outside to finance the deficit, Nigeria has $40 billion in reserves. Like Dr Mrs Ngozi Okonjo-Iweala reminded us, it is not illegal to spend one’s savings!

So the real problem is not spending but quality of spending (what are we spending money on?) and value for money (how much of it gets stolen versus how much gets into the purpose of the appropriation?)! Which means altering the ratio of spending between capital and recurrent expenditure in favour of capital spending; altering recurrent spending from maintaining bureaucracies to funding social investment in education, science and technology, agriculture, and law and order; improving the effectiveness and transparency of the procurement process; and stopping corruption! The regime needs to focus on these priorities.

But meanwhile until we reform procurements and reduce corruption, public sector spending will remain a sub-optimal source of economic stimulus in Nigeria given the reality that much of the money will be embezzled. Indeed public sector spending then becomes economically destabilising as stolen funds are aggressively exported, thus depreciating the Naira; aggressively diverted into real estate thus fuelling property prices; and aggressively deployed into ostentatious consumption thus contributing to erosion of moral values. In the circumstances, we can afford to be innovative and seek private sector stimulus in some targeted sectors which in spite of global recession will yield capital inflows. In my view such three priority sectors for Nigeria should be power, transportation and solid minerals.

I believe Nigeria can mobilise private capital domestically and internationally into all of these sectors in spite of the current economic conditions. These will replace some of the decline in government spending; generate taxes, employment and other economic spin-offs much like telecommunications deregulation did between 2001 and now, and in the particular case of power, contribute to economic efficiency. More importantly in all of these the legal framework for attracting private capital already exists in the form of the Electric Power Sector Reform Act of 2005, the Mines and Minerals Act of 2007 and the ICRC. What remains is for the ministers and regulators in charge of these and the administration in general to get going!