Devaluation (3)

The economy of Venezuela has shrunk by a cumulative 16 percent in the last two years, and inflation estimated at 808 percent for 2015, according to Forbes. There is now an increasing possibility that the country will default on its debt. For a country with the largest proven oil reserves in the world, that is catastrophic. The Late Hugo Chavez started the rot, and completely failed to learn from history.

 

The Venezuelan economic experience is so shocking and unbelievable. However, it also a clear reflection of how, very quickly, poor fiscal choices can send an economy on a tailspin. Nigeria should not laugh at Venezuela. We have been there before. In the 1980s and 1990s, the two lost decades, coupled with low oil prices, we consistently made very poor and naïve fiscal policies. When oil prices rose and remained largely reasonable, we did not sufficiently learn from history.

 

As I promised last week, I will discuss in a bit more detail three critical fiscal choices we have made in the last two decades that contributed to the vulnerabilities we now face. But, first, let us examine very briefly a simple structure of the Nigerian economy, and how the points I want to make relates to this structure.

 

Nigeria, with over 170 million people, is the most populous country in Africa and within OPEC. However, Nigeria is not the largest producer of oil within OPEC. That status belongs to Saudi Arabia, with over 11 million barrels a day. In fact, Nigeria, with just over 2 million barrels a day, is not in the top ten oil producing countries in the world. In addition, contrary to what many believe, there are some large oil producing countries that are not regarded in everyday sense as oil producers – because they do not rely on oil exports. They include the US, Canada, China, Brazil, Mexico, and Russia. The underlying point here is that, given our population and the size of our oil production, we have no business relying solely on oil exports. Even at the height of oil prices, the generous calculation of per capita oil revenue is about $400 US dollars per annum, less than what a 19-year-old Chinese girl will use in buying a Gucci shoe in London.

 

The second aspect of this simple model is that the government, which is a very important institution for facilitating economic development and the raising of living standards of the citizens of this country, relies almost exclusively on the exports of this commodity. It does mean that any fall in oil price, as we have seen in the last 18 months, will lead to reduction in government revenue and its ability to facilitate the improvement in our welfare. But to facilitate increasing welfare, the government must be a beacon of stability. To ensure stability, the government must not only save enough for when oil price falls, but strive not to overtly rely on it in the first place. If we use our reserves as the sole indicator of savings, an average of about $40 billion dollars in the last decade is not sufficient for the stability of both foreign exchange and government expenditure. Flowing from this is that our fiscal choices must start with sufficient savings and a broadening of the tax base to avoid reliance on oil revenues.

 

No doubt, most African economies still rely on the “tax” and rent from natural resources and international trade related duties and levies, but the most important form of government revenue, which helps deepen the relationship between the government and the citizens is taxation on incomes. But Nigeria’s total tax income, as a proportion of GDP is a miserable 6.1 percent (despite significant growth in the last five years) according to macroeconomic data compilations by the Heritage Foundation (2015). Nigeria’s ratio is comparable to that of Afghanistan (6.9%), Iran (6.1%), and Yemen (7.1%), but not to African economies such as Kenya (18.4%), Botswana (35.2%), and South Africa (26.9%). No wonder, the federal government alone has borrowed about N1 trillion in the last year, perhaps just to pay salaries.

 

Now, not only have we not saved enough when oil price was high due to political divisions, the little foreign exchange resources we have is given back in school fees and medical bills. Let us be clear about this, it is the prerogative of every parent to choose which school his or her ward goes too, and for an individual to determine where he or she receives medical treatment, but it is the responsibility of the government to organise the economy such that these choices are available within the country. That foreign education has grown to the point of Nigeria having over a million of her children studying abroad, expending over a US1 billion dollars annually in the process, and every plane out of Nigeria carrying at least a passenger for medical services abroad is a failure of fiscal policy.

 

These three fiscal choices that we made overtime has now contributed to the debate of whether there should be a devaluation or not. However, it would have been unnecessary if appropriate fiscal choices were made overtime.

 

Ogho Okiti