Moving the economy out of recession

Written by the Editorial Board of The Guardian Newspaper

The Buhari administration used its first seven months in office to strip the made-up facade that had been erected on touted robust but non-inclusive economic growth rates under the democratic dispensation and succeeded in the subsequent eight months to plunge the country into a deepening recession. The throes of the economic contraction have prompted three apex associations of the organized private sector (OPS), namely, NACCIMA, MAN and LCCI each to hold a separate dialogue with the Federal Government to improve the economic situation.

In the course of the dialogues, the OPS decried the adverse effects of the monetary measures being implemented, in the form of rising double digit inflation, high lending rates, the falling value of the naira, shortage and high cost of fuel and electricity. The resulting harsh business environment has led to increasing factory closures, growing unemployment, swelling under-employment and precipitous decline in purchasing power. To lessen the squeeze, the OPS cautioned that the VAT rate should not be raised and that the pioneer status tax incentive should not be withdrawn from the cement industry. The leadership of the OPS begged the FG to pay attention to the oil and gas industry and even canvassed that selected economic sectors be granted concessionary interest and forex rates. While the OPS was preoccupied with reeling off the distressing symptoms of the national economic disease which had been diagnosed 15 years ago, the FG representatives at the dialogues patronizingly “heard the stakeholders and took notes” to relay to the higher-ups. Subsequently, the Vice President attended the LCCI’s 2016 Presidential Policy Dialogue where, as has become customary, he dangled policy favours and placebos including “plans to release additional N100 billion for capital expenditure in key economic sectors… and to boost dollar liquidity”. Oh, come on! For economic revival, the age-long problems that culminated in the national economic contraction require urgent policy decisions and immediate action to remove the problems’ known root cause.

However, apparently consumed by the pet desire to end reliance on oil revenue for government business, the FG had instead turned attention towards boosting non-oil revenue. Firstly, last January, it signed the Multilateral Competent Authority Agreement which, while the dialogues held, was this month approved by the Federal Executive Council. The agreement enables automatic sharing of country-by-country reports by multinational companies in order to check tax evasion and avoidance. In this regard, the FG should also abolish the bloated general licence/shared services/technical agreement fees based on turnover superfluously granted to multinational companies in addition to tax rate on dividends that is below the level in their home countries. Secondly, government, which has for years mulled over doubling the VAT rate, is rumoured to be on the verge of taking that step. As earlier implied, the Manufacturers’ Association of Nigeria has explained compellingly that neither producers/service providers nor consumers deserve any increase of the rate at this time and the FG would be well-advised to tarry.

Thirdly, the FIRS has widened the tax dragnet to encompass some 700,000 new entities. However, it is doubtful if that list will make tax administration more efficient and grow tax receipts proportionately high relative to both the cost of collection and the economic price in an economy with starkly high incidence of poverty. It is oversimplification to lay out a taxation plan by regurgitating the country’s so-called low tax revenue/GDP ratio without relating the realized tax amounts to bank credit volume to the private sector (CPS), the investment of which hatches taxable income. The CPS/GDP ratios in countries with robust tax revenue/GDP ratios are several times higher than here and so (from that perspective) the national tax revenue level is not low. That fact, coupled with repeated protestations against multiple taxation gives the lie to any notion that the FG will scoop astronomical non-oil revenue merely through all-out collection of taxes by blocking various perceived loopholes including, lest it be overlooked, the elimination of tax consultants engaged by some state governments to usurp the role of government tax collecting agencies. Therefore, the FG should first improve the economic production environment in order to expand the tax base and takings.

For a conducive production environment, a market-determined realistic exchange rate is a sine qua non. Regrettably, the naira exchange rate, which since the 1970s has been fixed artificially, is based on external reserves derived solely from FG’s direct forex earnings and withheld Federation Account dollar allocations, which do not coextend the country’s total forex earnings. No wonder the currently flawed flexible naira exchange rate mechanism has within two months begun to incinerate the real sector and has rendered the populace impoverished. Also there exists an unconstitutional but de facto dual currency system effected by the operation of domiciliary dollar accounts (DDAs) on a permanent basis. The DDA’s house inflows of private sector export proceeds and forex acquired domestically mainly through excessive demand for public sector forex. The dollar has been elevated to the preferred store of wealth in the face of consistently depreciating naira as a result of the decapitated or unrepresentative volume of external reserves. A handicapped naira should cease for the economy to succeed.

Accordingly, in line with the CGN Act 2007, prompt conversion of total public and private sector forex holdings to naira legal tender amounts via a single forex market will produce not also a realistic and stronger naira exchange rate than at present but also accumulate steadily rising external reserves that are exclusively FG-owned. Consequently, forex currently nestling in DDA’s as if under a foreign jurisdiction should be converted within at most one month to naira sums while subsequent forex inflows should enjoy a shorter period of grace before being converted. Thereupon most of the problematic symptoms and issues raised by the OPS will dissolve or become easily controllable and the economy will experience vigorous growth. For example, government, the OPS and other economic agents will have access to over N70 trillion capacity of Nigerian credit at internationally competitive interest rates across the board for investment in the various sectors of the economy to complement the relatively meager federal/state capital projects. Welcome at last to the long-yearned-for private sector-led economy!
As regards to the increasingly strangulating impact of the unpredictable supplies of crude oil to NNPC refineries, natural gas to power plants as well as declining export crude oil volumes caused by pipeline vandalism, it is time to call spade a spade by putting the incidence of vandalism squarely on the Buhari administration’s delay in addressing its root cause: the continued denial of equitable allocation of the country’s resources through fiscal and true federalism will only intensify the economic woes.

So in order to quickly reverse the economic recession and launch the economy on self-sustained rapid growth and development, Buhari should, one, stop looking for alibis; two, shun being hostage to the vested interests that are steeped in the deliberate mismanagement of the naira exchange rate; three, end all stonewalling; and four, discharge the bounden duty of resuscitating the economy in accordance with appropriate and tested and workable methods.