CBN should unify official, unofficial forex markets – Ahluwalia
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Thu, 31 Mar 2016 || Nigeria,
A former deputy chairman of the Indian Planning Commission, Mr. Montek Singh Ahluwalia, was a resource person at the just concluded retreat of the National Economic Council (NEC). Addressing State House journalists at the sideline of the two-day retreat, the former chief economic adviser to the Indian government recommended certain measures to address the current economic challenges confronting Nigeria. Excerpts:
Are there some similarities between India and Nigeria?
There are so many similarities. One of them is that we are clearly federal systems. Nigeria about 36 states, India has 30 states. Of cause, the sizes are very different. In India, the largest state, Utapradesh, has about 120 million people and the smallest state in the North East can range between 20 million, but most of them are in the middle of 50 to 80 million people. Difference in the sizes of the states is one thing, but like Nigeria, the states are very diverse and some are industrially advanced, others are more remote, economically a little more backward.
So, the central government, like in Nigeria, has to deal with states which are not independent but soft sovereign entities. They need help and so the central government gives them a lot of money. But they also need help in ideas and capacity building and many of these issues have been discussed in the National Economic Council meeting which I have been participating in. We have similar meetings in India and the subjects being talked about are extremely similar.
Right now Nigeria is specially hit by an externally-induced micro economic crisis. The crash in oil prices really helps India because we are not an oil producer but an importer. But it hurts Nigeria. We have a big decline in oil revenues that reduce the spending capacity of both the federal and state governments. The discussion is based on how to respond to that in a manner that enables shared prosperity to happen, and inclusive growth to take place and so forth.
What would you recommend for Nigeria?
I would say that in order to make recommendations, you need to be an expert on Nigeria. I am not an expert on Nigeria. But I have tried to suggest things based on my own experience in India. One thing is very clear: the oil price collapse has led to a very big decline in growth in Nigeria, and nobody thinks that the oil price is going to shoot up in the short run. Nigeria has to recognize that the suffering of the oil price has to be there for a few years.
I would say that in order to make recommendations, you need to be an expert on Nigeria. I am not an expert on Nigeria. But I have tried to suggest things based on my own experience in India. One thing is very clear: the oil price collapse has led to a very big decline in growth in Nigeria, and nobody thinks that the oil price is going to shoot up in the short run. Nigeria has to recognize that the suffering of the oil price has to be there for a few years.
What was the reaction of the Nigerian government on that during the retreat?
The Vice President made a very good point that we should not rely on oil as if it is everything. We should think that maybe we have to do without oil revenue. That is the best approach. Non-oil revenues in Nigeria are too small. Even if you compare Nigeria with other oil exporting countries, you have not enough non-oil revenue. So, the highest priority from a microeconoic point of view will be to develop the non-oil revenue base. The federal and state governments can do something about that.
I feel that the Value Added Tax (VAT) that the Nigerian government has introduced is at a very low rate, it has lots of excemptions and also the coverage is quite limited; it has not covered many people who should be covered. So, I think the top priority should be to modernize and improve the VAT so that it becomes a bigger source of revenue in the days ahead. I think that is possible. I also feel that when you are faced with huge expenditure demands and most of the states are making points about expanding infrastructure, one of the ways to generate revenue is to reduce energy subsidies. Nigeria has very high energy subsidies. Many countries have had high subsidies, and everyone has agreed that we should reduce these sharply because beneficiaries of energy subsidies tend to be high-income individuals who can afford plans to use energies. Some mechanisms must be found to reduce energy subsidies.
Nigeria also has a problem on the foreign exchange side. The naira is under pressure. You have an official rate and a much more depreciated free market rate. My view is that one should move to unify these rates.
The Vice President made a very good point that we should not rely on oil as if it is everything. We should think that maybe we have to do without oil revenue. That is the best approach. Non-oil revenues in Nigeria are too small. Even if you compare Nigeria with other oil exporting countries, you have not enough non-oil revenue. So, the highest priority from a microeconoic point of view will be to develop the non-oil revenue base. The federal and state governments can do something about that.
I feel that the Value Added Tax (VAT) that the Nigerian government has introduced is at a very low rate, it has lots of excemptions and also the coverage is quite limited; it has not covered many people who should be covered. So, I think the top priority should be to modernize and improve the VAT so that it becomes a bigger source of revenue in the days ahead. I think that is possible. I also feel that when you are faced with huge expenditure demands and most of the states are making points about expanding infrastructure, one of the ways to generate revenue is to reduce energy subsidies. Nigeria has very high energy subsidies. Many countries have had high subsidies, and everyone has agreed that we should reduce these sharply because beneficiaries of energy subsidies tend to be high-income individuals who can afford plans to use energies. Some mechanisms must be found to reduce energy subsidies.
Nigeria also has a problem on the foreign exchange side. The naira is under pressure. You have an official rate and a much more depreciated free market rate. My view is that one should move to unify these rates.
How best can that be done?
There are different ways of doing that, but generally, to run a country with an official rate and a much more depreciated market rate introduces a lot of distortions and sooner or later, people think that the rate will go to the market rate. And in anticipation of that, money that will come in will wait until people think they can get a better rate. That is another important area in the microeconomic side.
I feel also that as we raise tax revenue which I think your government wants to do, it may take time for the revenue rise to occur. Your big strength is that you have a very low debt to GDP ratio which I think is about 16 per cent. Most other countries will be around 25 and 28 per cent and even up to 40 which is not regarded to be bad for a developing country. The problem in Nigeria is that you have not generated the revenues to sustain higher debt, but if you are doing that, that is, if you are taking the steps on the revenue side, you could perhaps anticipate in the success of those steps and borrow more in order to maintain expenditure. And if Nigeria wants to get growth back and generate employment, and so on, some expansion of investment in infrastructure is crucial--national and state level infrastructure. Our experience in India is that the development of rural roads induces huge increases in rural prosperity from varieties of things. A pregnant woman having a difficulty in delivering can get to the hospital faster if rural roads are good. Also, people selling new products and technologies go into the villages in order to find the market if the rural roads are good, but if the roads are not good, then, you get a bit isolated. We have been successful there in india and I am quite pleased that is what they are discussing here.
There are different ways of doing that, but generally, to run a country with an official rate and a much more depreciated market rate introduces a lot of distortions and sooner or later, people think that the rate will go to the market rate. And in anticipation of that, money that will come in will wait until people think they can get a better rate. That is another important area in the microeconomic side.
I feel also that as we raise tax revenue which I think your government wants to do, it may take time for the revenue rise to occur. Your big strength is that you have a very low debt to GDP ratio which I think is about 16 per cent. Most other countries will be around 25 and 28 per cent and even up to 40 which is not regarded to be bad for a developing country. The problem in Nigeria is that you have not generated the revenues to sustain higher debt, but if you are doing that, that is, if you are taking the steps on the revenue side, you could perhaps anticipate in the success of those steps and borrow more in order to maintain expenditure. And if Nigeria wants to get growth back and generate employment, and so on, some expansion of investment in infrastructure is crucial--national and state level infrastructure. Our experience in India is that the development of rural roads induces huge increases in rural prosperity from varieties of things. A pregnant woman having a difficulty in delivering can get to the hospital faster if rural roads are good. Also, people selling new products and technologies go into the villages in order to find the market if the rural roads are good, but if the roads are not good, then, you get a bit isolated. We have been successful there in india and I am quite pleased that is what they are discussing here.
In the olden days, infrastructure used to be built by the public sector, but now, for many kinds of infrastructure, it is possible to do it through public private partnership (PPP). Bring the private sector persons and lay down very clearly, what their responsibilities are, what is the concessional agreement that the government is entering into. I think that if everything works together, you can get a lot of investments. If you want PPP to work, you have to have a PPP law which makes it clear that this is part of government strategies. If Nigeria has such a law, investors particularly foreign ones, are more reassured that if they invest, it is part of a legitimized framework that people will not subsequently question because whenever you bring the private sector into something that was earlier done by the public sector, there is a lot of suspicion. In india for example we found out that the moment the private sector is brought in, the performance of the private sector is carefully examined to see if they are letting the system down. But they don’t do the same thing for the public sector. In the presentation I attended (at the NEC retreat), it was said that not a single PPP project has been properly executed in Nigeria. I asked what they meant by this, they said not completed on time. So, the question you need to compare whether the public sector projects are all completed on time.
Nigerian government’s personnel costs are observed to be gulping huge resources. What can be done in this regard?
Nigeria does not have excessively high levels of expenditure. So, it is not a case of where you are spending too much in relation to GDP. What is true is that most of what you are spending goes on salaries. We, in India, are saying go into better education, better health. If you go into things like education and health, policing and security as well as justice delivery, you will have to hire a lot of people to deliver these services. The real question is: are the salaries too high? At least in India, for the higher skill jobs, the salaries are not too high. The same fellows getting much better salary are always in the private sector. Unfortunately for the lower skilled jobs, the public sector salaries tend to be higher than the private sector salaries. That creates a problem which is that the people who have jobs in the private sector always want jobs in the public sector. The reason is that government employment pays wages that are higher than market wage.
Nigeria does not have excessively high levels of expenditure. So, it is not a case of where you are spending too much in relation to GDP. What is true is that most of what you are spending goes on salaries. We, in India, are saying go into better education, better health. If you go into things like education and health, policing and security as well as justice delivery, you will have to hire a lot of people to deliver these services. The real question is: are the salaries too high? At least in India, for the higher skill jobs, the salaries are not too high. The same fellows getting much better salary are always in the private sector. Unfortunately for the lower skilled jobs, the public sector salaries tend to be higher than the private sector salaries. That creates a problem which is that the people who have jobs in the private sector always want jobs in the public sector. The reason is that government employment pays wages that are higher than market wage.
So, it is not that the people who want government employment are unemployed. They are just employed. I would not say that Nigeria is employing too many people; maybe so many people are being employed for certain categories? But if you do the education, training and all the things they are talking about, you would have to employ a lot of people in the government. The real problem is that the government doesn’t have enough resources. Your tax revenues at the ratio of the GDP is at half what they should be. So, if you can mobilise those resources, you can meet these expenditures.
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