Foreign and local economic experts have said President Muhammadu Buhari should put at the top of his second-term agenda the removal of petrol subsidy as well as the reduction of interest rates in a bid to stimulate investments and economic growth.
Experts at Agusto & Co Limited, a credit rating agency, said in a report on Tuesday that the country “is currently in a dire fiscal strait and the numbers are quite grim.”
“For instance, despite the positive spin about Nigeria’s benign debt to Gross Domestic Product currently around 20 per cent, interest payments as a percentage of revenue are over 60 per cent,” they said.
The Lagos-based rating agency said Buhari’s government would have to work to raise revenue while also restructuring government spending.
It said, “All options on the table for Mr Buhari in his last term are hard choices with no easy way out. For instance, Nigeria’s current fuel subsidy regime indicates the country may have re-adopted opaque practices of the past that not only create a huge fiscal hole but a morass as well.
“With subsidy payments probably in the range of N1.2tn-N1.3tn annually, the country is obviously hemorrhaging especially amidst the steep opportunity costs. Mr Buhari will not only have to stop this fiscal hemorrhage but also muster the political will to deregulate the downstream petroleum industry once and for all.”
According to Agusto & Co, some of the big issues that will make or mar Buhari’s economic records will be the management of subsidies and other cost-unreflective tariffs being stifled by price controls.
“These reforms will require the removal of subsidies on the pump price of petrol, allow market forces to determine the domestic price of natural gas, allow electricity tariffs that enable operators to earn margins on their costs and also ensure exchange rates reflect fundamentals. These reforms could help stimulate investments across the board and unlock economic growth,” the experts added.
They said the Buhari administration should seek to improve efficiencies in the economy by concessioning key infrastructure and eliminating monopolies of state-owned enterprises in key sectors such as aviation (airport ownership and management), railway and electricity transmission by opening up the sectors to private sector investments.
The Global Chief Economist, Renaissance Capital, Charlie Robertson, in an emailed note on Tuesday, said Nigeria would require a doubling of oil price or industrialisation to achieve real per capita GDP growth of four to six per cent (i.e. headline GDP growth of seven to nine per cent).
He said, “Without it, per capita GDP growth may be around zero per cent, which implies headline GDP rising at roughly three per cent annually.
“To achieve industrialisation, Nigeria needs to raise the adult literacy rate from 60 per cent to 70-80 per cent – which we think can happen from 2024 onwards; treble electricity consumption – which we assume requires at least a doubling of the electricity tariff, and double the investment rate from 13 per cent of GDP to 26 per cent of GDP – or triple it, to match what Ethiopia is doing.”
Robertson added, “To double the investment rate, we suggest that reforms may be needed, like removing the implicit fuel subsidy that costs about 0.5 per cent of GDP. It supports consumption and not investment.”
He said the government should “boost domestic savings and bring down interest rates which will probably require a smaller budget deficit and higher taxes, and encourage foreign direct investment, which in 2018 fell to $2.2bn, according to the United Nations Conference on Trade and Development.
“Ghana got $3bn. To match Ghana (per capita), Nigeria should be getting $24bn a year. A change of approach to MTN, the oil majors and others may be required.”
According to Robertson, the naira should be allowed to trade closer to fair value, estimated today at N440/$, N470 by year-end and N670 by end-2023.
“Allowing faster currency depreciation does partly contradict point 3 on cutting interest rates,” he added.