The solution to Nigeria’s economic problems lies in its 2016 budget

Nigeria is facing its worst economic crisis in decades but many did not understand how bad things had gone until the recent release of some figures by the National Bureau of Statistics. Inflation hit a nearly six-year high last month and the economy contracted by 0.36 percent in the first quarter of 2016. There was an urgent need for policy makers to react but analysts say decisions taken so far may not be the solution to Nigeria’s economic challenges.

The central bank on Tuesday held interest rate at 12 percent despite rising inflation in the country. It’s most significant decision was adopting a flexible exchange rate. The apex bank, backed by President Muhammadu Buhari, had since March 2015 pegged the dollar at N199. While the freeing up of the exchange rate market will excite investors, it will not solve the economic problems Nigeria currently faces.  In fact, it may in the short run make inflation rise.

Nigeria’s revenue has begun to dwindle before President Buhari came into power. The rot in the system was also apparent, so he knew what he was facing. His promise to clean the system and change things earned him the support of Nigerians but his seeming economic ineptitude has made many who voted for him speak against him. The Nigerian government has made some policy missteps and has itself to blame for most of the challenges it faces now.

In this interview with Ikpenmosa Uhumuavbi, a corporate lawyer who is Senior Counsel at Brace Law Partners, he speaks about how Nigeria, Africa’s largest economy found itself in its present economic state and the options it has to scale through. Uhumuavbi is also a doctoral candidate in International Banking.

The mistakes

Monetary authority seems to have been rendered almost ineffective by the lack of unanimity and coordination in fiscal policy.

The Government may have taken policy decisions based on political expediency. It is painfully difficult to decipher the economic principle from which they are distilled. As a result, the economy is now left in a limbo.

The philosophy and underlying principles of the 2016 budget which was passed earlier in May tilt towards diversification, import substitution and export promotion. However, the practical interpretation of current sectoral policies are diametrically opposed to this position.

What lies ahead

With weaker currency, following the devaluation of the naira, and uncertainty in the macroeconomic environment, asset prices are extremely undervalued. Therefore, I see massive privatisation of Government-owned enterprises in the coming weeks and months. With undervalued assets come its attractiveness to investors.

These may raise several issues bothering on pricing, legality of sale, need for legislative oversight, issues around procurement and national security. Also, issues around employment, local content and legacy management cannot be left out.

While cherry picking sectors for investment on the basis of attractiveness, others may suffer neglect as Government surrenders its willingness to engage in private enterprise. This, therefore, is one of the challenges of zero intervention by Governments in enterprise.

I see increased financial activity especially portfolio investors take centre stage. The current policy environment is extremely attractive for Foreign Portfolio Investments (FPIs) looking for short-term positions to hedge their long ones.

Sadly, our market has a poor history of transmitting the gains within the financial market into the real economy. In fact it has been practically impossible to redirect investment flows into sectors they are needed most. This is partly due to the nature and structure of our market.

Going forward, I see growth in financial activities within the capital market without corresponding growth and development in the real sector.

This carries systemic disadvantages to the capital market especially in the face of sudden capital flight.

Two cents for the government

The current policy situation may lead to increased income inequality, social unrest and lopsided development. To stem this, the government may need to revisit its policy prescriptions.

The Nigerian government should go back to the philosophy and underlying principles of the 2016 budget. It needs to put policies in place to encourage import substitution and export promotion.