As Nigeria’s economic crisis deepens, DEBORAH DAN-AWOH speaks with Chief Economist and Country Manager of PricewaterhouseCoopers, Dr Andrew Nevin, on possible solutions to the problems
Recently, the World Bank said that continued rate hikes could lead to a global recession. How would such a recession impact the Nigerian economy?
I think it’s very likely that we enter a global recession for many reasons, including just the demographics of a declining and aging population outside of Africa. China has real difficulties with the housing and construction industry. And we know all the issues going on in the United States and in Europe. Of course, it affects Nigeria, but we can’t necessarily do anything about the global economy. We need to focus on the fundamentals that we can affect in Nigeria, and there’s no particular reason that our economy shouldn’t be shrinking, even if it’s affected by the global economy because we have lots of sectors that we can be growing for the Nigerian population within Nigeria and Africa.
Nigeria is hard hit by inflation. What is the biggest driver of inflation, especially the food part of it, in the country?
Inflation is obviously a tremendous concern around the world, particularly in Nigeria where food inflation is a real worry. More than 50 per cent of the population spends more than 50 per cent of their income on food. So, inflation has an incredibly negative impact on the bottom of the pyramid. And when people struggle to eat, we all understand the consequences of that. I think in our context, the single biggest determinant of inflation is the security situation for food inflation because the security situation affects agricultural production as farmers reduce the acreage that they’re prepared to do. So, our perspective on this issue is that focusing on all the things that we can focus on, but particularly if we don’t solve the security issue or make progress there, we’re going to continue to have significant food inflation as farmers are reluctant to go out into the fields to plant the crops.
The CBN has again raised the lending rate. What impact will it have on the economy?
It was inevitable that we would have a significant rise. The benchmark rate for Nigeria was increased by the MPC by 150 basis points. Obviously, it has an impact on the potential borrowers and the cost of funds. But I mean, the reality is that the Nigerian economy has relatively little borrowing.
So, I think it’s perhaps about 20 per cent of GDP to bank assets for lending and has obviously an impact as well on government deficit. But again, I mean, we don’t have a significant debt level in Nigeria either from the government or the private sector. So while the CBN, in our view, is doing the right thing in terms of raising interest rates, it doesn’t necessarily have the same knock-on effect on the economy and the other issues. We should address the structural issues. The fiscal policy is actually more important for the growth of the Nigerian economy than the interest rates. And the interest rate increase was essentially forced on us by events in the rest of the world.
With regard to the Revised Nigerian Capital Market Master Plan (2021-2025), you said in a presentation that the capital market needed to be 10 times bigger in the next decade for it to be meaningful for Nigeria.
What exactly does this mean?
Yes, we did say in the capital markets master plan that capital markets seem to be much bigger. We’ve tended to have a focus in Nigeria on the banking sector. It has performed very well. We have a lot of high-quality banks, and we have a lot of stability in the banking system, given the CBN management, particularly things like the CRR ratio being so high, which prevents any kind of financial instability.
But we need to rely much more on the capital markets. We need significant investment in Nigeria and the only way to do that is eventually through the capital markets. We can’t do it through private companies, people need liquidity. We also need to find ways for the population as a whole to invest in the country. So, it’s very important that we expand the capital markets. The issue has been the Securities and Exchange Commission, NGX, FMDQ and those sorts of market participants have done a fantastic job over the last decade in leading the capital markets industry.
Unfortunately, you know, we still have a very harsh economic environment. And in that environment, we’re not getting the investment and we’re not getting the capital formation in the capital markets that we know we need. So, the solution is not what the capital market players do, because they’re going to do what’s required and happy doing what’s required. The solution is to create a much better investment climate.
Recently, the Federal Government said in order for the National Development Plan to improve Nigeria’s economic outlook, it will require N298.3tn capital investment from the private sector.
How feasible will this be? And what alternatives exist?
In our view, it has progressed that the Federal Government recognises the need for private capital. I think that in the National Development Plan, they stated about 85 per cent of the capital requirements have to come from the private sector. And, of course, we’ve got this number, N300tn of capital investment required and 85 per cent is over N250tn.
But if we continue to be a harsh environment, people will not invest in Nigeria. So, you ask the question, what alternatives exist? I don’t think there is an alternative apart from making it a more attractive environment. So, the message that needs to get through to the Federal Government and other state governments around the country is, why are people not investing in Nigeria? We have the biggest opportunity on the planet for economic growth. There’s no other country that’s going to have the population growth that we have.
The country’s economy can easily expand 10, 20, 50 times in the next 30 or 40 years. And yet, we’re not getting investment. I think the Federal Government should be asking themselves the hard question. They’ve come to the realisation that we need private sector investment, but they haven’t found out why people from the private sector, which include Nigerians in the Diaspora and people outside of Nigeria, are refusing to invest in Nigeria despite the opportunities. Unless they address that issue, we’re going to continue to have real economic problems.
According to the Organisation for Economic Cooperation and Development, the digital economy is valued at $3tn. How can Nigeria tap into the wealth of this industry?
The way that Nigeria is going to tap into this digital economy and be successful in the next five to 10 years is by a large number of remote workers in Nigeria. So, people who are part of the global digital economy are inserted into global value chains and earn foreign exchange. They work for foreign companies working on foreign projects where the purchasing power is higher. The pricing is higher and they earn that FX for themselves and for Nigeria. We need a target of about two million remote workers working in the global value chains, basically digital value chains. That’s how Nigeria is going to tap into this digital economy and we’ve already started down that path as our paper explains very well.
Lately, you have published reports on brain capital and technological advancement. How do you think these elements will shape the Nigerian situation?
Yes, we did put out a paper on the export of brain capital. We’ve put out the number – two million people now and this should be the target for the country. I mean, for us, I think it’s pretty clear that it’s the only economic strategy that can work.
For any economic strategy that requires a high capital investment and relies on domestic demand, domestic pricing models are going to fail. We are not in a position to be able to export physical goods from Nigeria for reasons I think we all understand. So, that includes the poor problems, the energy problems, and the infrastructure problems. So, we’re not competitive and exporting physical goods, but we can be competitive. So, the only strategy that’s going to work is to export high-value-added services.
Economic inequality in Nigeria has reached extreme levels. What measures can the government adopt to reduce the gap between the rich and the poor?
Inequality, not just in Nigeria but around the world, is really a severe and increasing problem, and we haven’t done a very good job of addressing it. Residential housing employs skilled people, but it obviously has implications for the way we handle human capital, not just in universities but also in vocational training. We produce carpenters, plumbers, electricians, those are all well-paid jobs.
And if we have the expansion of residential real estates, which we have a great need for in the country, it raises incomes significantly. Then agriculture, I mean, we want farmers to do well and we also want low prices. We also want farmers to have high incomes. There are good crops that are able of producing high incomes like sesame seeds which, for example, produce high income for farmers. We can develop those agricultural value chains, but, of course, for them to have low food prices and also high farmers’ income, we need to have efficient production, more mechanised production, better seeds, and right sort of fertilizer outreach in order to do that. So, those three sectors really can make a difference in having broad-based prosperity in Nigeria. But yes, we do face a kind of crisis of inequality.
As the oil sector suffers major setbacks, what alternatives exist for Nigeria to grow its revenue?
We need to be exporting services. That’s the only strategy that has a chance of working for Nigeria. We don’t make projections about the economy because we’re part of the economy and it depends on what many people do. Making projections is not helpful. But if the government follows our strategy, people are following our strategy anyway, things may work better. If the government supports this strategy through the right sorts of interventions and support for the digital economy, we could have a very positive scene where we’re growing six or eight per cent. We can solve our balance of payments problem with these remote workers.