A one-time bank worker and former Chairman of the Nigerian Textile Manufacturers Association (NTMA), Mr. Ibrahim Igomu, tells Economic Confidential Acting Editor, Ewache Ajefu, in Abuja that the disconnect between the Federal Government’s budgetary intentions and those of the states is responsible for the poor state of the economy…
Assessing The Economy
The economy is going through a recession. We are having very serious infrastructure challenges, especially Small and Medium Enterprises that depend heavily on electricity and transportation in terms of supply of fuel. These are all challenges that affect the smooth running of small business like my own. Then access to foreign exchange is a major challenge and difficulty in predicting the economic direction of the country.
Panacea to fuel scarcity and inadequate power supply
Starting with the issue of supply of petroleum products, government needs to improve the restructuring of the downstream holistically. If you are introducing change into a sector, you should be able to carry all the stakeholders along. In carrying the stakeholders along, there are groups in human resources we refer to as resistors. They are used to the status quo and will either consciously or unconsciously resist the change you intend to bring to that sector. By the time you engage all stakeholders then you bring in your restructuring and change systematically. But basically what has happened has been a knee-jerk approach to change management. You have withdrawn subsidy, you did not even consider whether you have enough stock in the event that some key players back out of the system in reaction to the removal of subsidy. That is why it is affecting the industry and entire country negatively.
On subsidy and refineries
We have discovered that government has not been efficient in turning around the refineries. Maintenance of a refinery is a profit-oriented venture except you approach the turnaround maintenance with private sector mentality, choosing who should handle the it must not be a decision that is either patronising, emotional or out of nepotism. You must take objective decisions. Who built the refineries? Who has the competence to turn it around? Who will give you a guarantee? But the problem we are having is that government is approaching a purely business matter in a government manner. Bidding for it will allow civil servants with vested interest to hijack it. But if it is purely run like business, you will see that they will bring in people that will give guarantees, preferably the initial contractors. If I give you $200 million, $400 million can you give me a performance guarantee from an international bank that in the next six months this refinery will not breakdown. That is the approach that is lacking in the turn-around of the refineries.
Non-passage of PIB and energy sector challenge
I do not believe that a policy document that has not even been implemented can have such enormous power. The only way I can accept is that people are forecasting based on the context of the PIB. If this comes into force, it will affect me in this way or in the other way. There are petroleum industries in the world today, like Venezuela and Saudi Arabia that are even more regulated than the provisions of the PIB.
They are known and the company runs profitability. Look at Gazprom in Russia, everybody knows that that is the most regulated petroleum industry, but today it controls 85 per cent of gas supply in Europe. This is the company that is coming out of a state-run economy like Russia. If you are bringing change into the system, try to identify key stakeholders and those that are likely to resist the change and make sure you carry everybody along. You cannot change over-night; there will be too much shock to the system.
A country of about 170 million people cannot afford the shock we are experiencing. As I speak, we may not meet our GDP target for 2016. It is affecting our inter-regional trade. Goods that should be flowing freely between Nigeria–Chad, Nigeria–Cameroun, Nigeria–Benin are being affected due to lack of fuel. Purchasing power is low because government is not injecting funds to the system. It is when you inject funds into a system, into infrastructure, you create jobs, there are feeder industries and that is what really gives the economy the power to boom because everybody benefits within the value chain. Government is not paying contractors, no funds release, the budget is yet to be signed by President Buhari.
There is liquidity crunch in the system! Then to worsen matters, exchange rate issues, and inflation. The reason the private sector is also suffering this is the imbalance in our monetary system.
Most Nigerian banks instead of leveraging on the large economy we have by lending to other key sectors like agriculture, manufacturing; prefer to lend to the trading sectors where they make fast returns. They prefer to hold government deposits where they make huge interest by lending it upstream. But with the introduction of the Treasury Single Account, government mopped up all those easy funds and most of these banks that do not have a traditional banking base – which is a current account – are negatively affected.
It’s very expensive sourcing funds from such banks. And they continue to over lend to trading at the detriment of the real sector where we have comparative advantage. The banks are the biggest culprits. The banks are not bullish in lending to economic activities and even when they do lend it is too expensive. Would you blame the banks when the banking tradition in Nigeria is mostly short term? You know there are banks in fairness that have leveraged on a robust current account base. Banks like First Bank, Union Bank, and to a large extent GTB have a very sound current account base.
Current account base and sovereign wealth fund
You make sure you have much retail customers as possible giving them flexible interventions like Temporary Overdraft (TOD) with very favourable interest rates with moratoriums. So, by the time you have about 2–3 million people in your current account base that have access to these loans…. But when you starve majority of your customers of access to credit and you concentrate credit in the hands of few people because you feel that it is in safe hands, they are not likely to default. It will affect the economy.
Economic growth is quite different from economic development. There can be growth in economic activities, but no development in the country’s economic institutions. Regulatory agencies, charged with implementation of fiscal policies, are not intervening properly in the market. No accurate data of unemployment, small scale farmers and traders. CBN is supposed to use its monetary policy to encourage all these activities.
We have the issue of the Sovereign Wealth Fund (SWF) which was supposed to cushion any negative effect on the sudden drop in crude oil price. You and I know how the state government resisted this laudable economic policy. They insisted on squandering the savings made by the federal government. And the moment the prices of crude oil crashed, the government had nothing to fall back on. But in the last six years, we have been squandering these funds not on productive activities, but mostly consumption, which has affected the economy negatively.
Can 2016 budget stimulate the real sector?
Looking at the budget it’s an excellent document which should kick start the economy that is slowing down. The only part of our economy that is being managed efficiently is the federal aspect of our economy. In most of the states there is disconnect. Most of the states are heavily indebted. Most of the states should be on receivership.
They can no longer pay salaries, or meet all their financial obligations. Very few of them can be called viable states like Kano, Kaduna, Lagos, Rivers, Delta most of the eastern states are viable. You know a state like Osun cannot even pay salaries. They are heavily indebted and they are still borrowing from banks. There are states today that if they give you a contract and you approach any bank, having knowledge of their debt portfolio, the bank will not be ready to finance it.
There is disconnect between federal budget and the state budget. The federal budget is an excellent budget and with the required discipline, I can see the zeal with which they are going to implement it. Most of the states might be unable to key into the benefits because of the heavy load of political appointees sucking the financial lifeline out of the state. Everybody is still running to the center cap-in-hand. Why can’t other states emulate Lagos and Kano who do very well without federal allocations?
The moment you are not economically viable it is expected that your workforce and expenditure will be very trim. There is a disconnection between the federal budgetary intentions and the state budgetary intentions and of course the local government which are controlled by the state. Nobody has seen any document of what they intend to do.