Oil export earnings, it would then seem, remains the be-all and end-all of our economy. Even the non-oil sector of the economy is but a derivative of the oil sector. Without it, consumer spending, about 70 per cent of domestic output, collapses, and along with it, demand for the output from the economy’s other sectors.


We sat across the table, at lunchtime, last week. Not a regular occurrence, this meeting. But worth it, each time. Given his access to data on the domestic economy, he qualifies as one of the most important thinkers in this space. Not just access to data, though. The gentleman is simply qualified to speak to the economy’s strength and weaknesses.

The background to our palaver that afternoon is a familiar one. Elevated oil prices and improved global financing conditions have created a supportive environment for the Nigerian story. But there is always the danger that both of these prove temporary. Higher oil prices, for one, are an incentive for new investment in capacity that drives new output. And/or, they end up making renewables cheaper. Ages ago, the investment cycle in the oil and gas industry was long enough to force major oil companies to sit out temporary disruptions. But as Occidental Petroleum’s purchase of Anadarko Petroleum indicates, shale is the new killer application in the industry. Its shorter time-to-market cycle allowing operators to leverage temporary shocks to the market.
On the other hand, the recent escalation in trade tension between the U.S. and China need only feed into higher domestic prices in the former for the U.S. Federal Reserve to contemplate a hike in its benchmark rate. And along with that another “taper tantrum” exit of non-resident foreign investors from emerging and frontier market like ours.

It is important, therefore, how government responds to these stimuli. Waiting for the inauguration of Mr. Buhari’s second term, it wasn’t idle speculation to dwell on how different from the first four years, this second term is going to be. How significant, then, was the confirmation of the governor of the central bank for a second term in office? Much of the same muchness looks to be on offer. And this wasn’t a personnel thing. It is fairly certain that the Buhari government is unlikely to be less dirigiste in its second coming than it was in its first.

Which is a big problem. Reforms to the economy still matter. And this isn’t so much about our infrastructure endowment and the domestic ease of doing business. Because of the incumbent administration’s preferred spending patterns, Nigeria’s public finances are near a very parlous state. Government has therefore got to do two things. First, change the composition of its spending in such a way that health and education matter more. That way we may start to get more bang for each buck spent, including through boosting domestic productivity. Second, diversify its sources of income. On the not so small matter of government revenues, how much does it matter that last year, the internally generated revenue from the sub-national governments reached ₦1.17 trillion — a 25 per cent increase on the ₦936 billion generated in 2017?

…our businesses are anaemic and losing blood. Far better to remove the burden on government finances of subsidies that support a tiny relatively affluent class. Back of the envelope calculations estimate that carefully targeted at the “poor and vulnerable”, just 20 per cent of the current subsidy on fuel should severely dent domestic poverty rates.


Across the private sector, complaints have been of racketeer-type operations by the different internal revenue services. Strong-armed to cough up more, private businesses have yielded to governments’ blandishments. And we have seen IGR rise on the back of this. But our businesses are anaemic and losing blood. Far better to remove the burden on government finances of subsidies that support a tiny relatively affluent class. Back of the envelope calculations estimate that carefully targeted at the “poor and vulnerable”, just 20 per cent of the current subsidy on fuel should severely dent domestic poverty rates.

That is if we can somehow stop the bureaucracies that we are wont to set up to manage the subsidy removal schemes from appropriating much of the monies, thus hypothecated. Is there an argument for building on the ubiquity of the mobile phone, and current levels of biometric identification in the country, to pay these cash transfers directly into beneficiaries’ accounts?

Obviously.

The stronger argument, though, was for taking another look at the central bank’s response function. Estimates of the share of our circa ₦40 billion gross external reserve that is accounted for by “hot money” is something around ₦18 billion. All of this is here because of the “carry trade” — non-resident investors borrow in a low-yielding currency (the U.S. dollar, for example) and invest in the naira (a high-yielding currency). All of their interest is in the yield. And none in the economy’s productive potentials.

In the near-term, a significant share of holdings of the central bank’s short-term instruments mature in August. Our newly-appointed governor will then be faced with a choice akin to that which Thomas Hobson offered patrons of his livery stable: an interest rate hike, or perdition (the naira’s exchange rate, first, then inflation, etc.).


If the yields on naira-denominated asset continue to trend down, as most patriots would wish (in order that banks may lend more to the productive sectors of the economy), then these investors will leave. Destinations such as Egypt now beckon as an investment alternative, I am told. And as these fair-weather investors leave, they would bring pressure on the naira’s exchange rate. On the upside, it seems that the flightiness of this investor category has been mollified in recent times by the resurgence of global oil prices.

Oil export earnings, it would then seem, remains the be-all and end-all of our economy. Even the non-oil sector of the economy is but a derivative of the oil sector. Without it, consumer spending, about 70 per cent of domestic output, collapses, and along with it, demand for the output from the economy’s other sectors. Of course, we should be worried by this potentially explosive cocktail. But, ultimately, these are medium- to long-term concerns.

In the near-term, a significant share of holdings of the central bank’s short-term instruments mature in August. Our newly-appointed governor will then be faced with a choice akin to that which Thomas Hobson offered patrons of his livery stable: an interest rate hike, or perdition (the naira’s exchange rate, first, then inflation, etc.).

It was Ramadan. Our lunch meeting had neither food nor beverages on the table. Otherwise, it would have been easy to puke at this point.

Uddin Ifeanyi, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.