Resolve, Resilience, Restraint

For more than a decade, growth in Sub-Saharan Africa was driven by an extraordinary combination of improved policies, stronger institutions, high commodity prices, and high capital inflows. The region has now entered a different phase, where commodity prices and capital flows are far less supportive. Emerging markets, which propelled global growth after the 2008 global financial crisis, have slowed; advanced economies are still recovering from the impact of that crisis; and financial markets remain volatile. Lower oil prices have sharply reduced Nigeria’s export earnings and government revenues. Both are likely to remain at depressed levels, reducing the space for policy interventions to address Nigeria’s social and infrastructure needs. Private-sector investment will also be affected. Investor confidence about the outlook has remained weak, and financing is likely to become more difficult and more costly for everyone.

With US interest rates expected to continue to rise, albeit slowly, the likelihood of capital outflows will increase, and exchange rate pressures could mount as investors re-assess their appetite for risk. More broadly, Sub-Saharan Africa is also facing spillovers from geopolitical factors, including the fight against Boko Haram. The threat of terrorism is very real and never far from our minds. Having been in Paris during the November attacks, I know firsthand the sorrow that so many Nigerians carry in their hearts. In this region, terrorism not only takes a human toll but it also makes public finances more fragile. How? By widening budget deficits. Revenues are lower, including from lower growth, and spending needs higher, including for security and for supporting those impacted by the violence. One immediate downside is higher financing needs that can crowd out other essential public spending.

Nigerians have created a large and diversified economy that has grown by about 7% a year over the last decade. This has been a remarkable achievement, a testament to Nigeria’s immense potential. The outlook, however, has weakened. For a country with a rapidly increasing population, this means almost no real economic growth in per capita terms. On top of the slowdown, vulnerabilities have increased. The ability to manage shocks is restricted by low fiscal savings and reserves. And the weakening oil sector could stress balance sheets and put pressure on the banking system. Reduced confidence and lower capital spending also impact the non-oil corporate sector.

Unfortunately, this sector looks less resilient today than during the downturn of 2008-09. Companies that have increased their leverage and US-dollar debt in recent years may now come under pressure as they face rising interest rates and a stronger dollar. Nigeria also has a large regional footprint, and its fortunes affect that of its neighbors, especially through trade. For example, it is estimated that a 1% reduction in Nigeria’s growth causes a 0.3% reduction in Benin’s growth. So what can policymakers do? I see an immediate priority—a fundamental change in the way government operates.

What do I mean by that? The new reality of low oil prices and low oil revenues means that the fiscal challenge facing the government is no longer about how to divide the proceeds of Nigeria’s oil wealth, but what needs to be done so that Nigeria can deliver to its people the public services they deserve—be it in education, health, or infrastructure. This means that hard decisions will need to be taken on revenue, expenditure, debt, and investment going forward.

My policy refrain is this: Act with resolve—by stepping up revenue mobilization. The first step is to broaden the tax base and reduce leakages by improving compliance and enhancing collection efficiency. At the same time, public finances can be bolstered further to meet the huge expenditure needs. For example, the current VAT rate is among the lowest in the world and well below the rates in other ECOWAS members—so some increase should be considered.

Build resilience—by making careful decisions on borrowing. Nigeria’s debt is relatively low at about 12% of GDP. But it weighs heavily on the public purse. Already, about 35 kobo of every naira collected by the federal government is used to service outstanding public debt. Exercise restraint—by focusing on the quality and efficiency of every naira spent. This is critically important. As more people pay taxes there will, rightly, be increasing pressure to demonstrate that those tax payments are producing improvements in public service delivery.