I’m reading a book at the moment written by Art Williams. Published in 1988, “All You Can Do Is All You Can Do, But All You Can Do Is Enough” is a book with a long title and a particularly unattractive cover (the edition I’m reading anyway) but it’s packed with powerful principles to help you achieve lasting greatness in your life, I highly recommend it. Just before going to bed last night, I read chapter 7: “Dream Big – But Keep It Simple” and as I’ve done from the beginning of the book, I was highlighting whole paragraphs and nodding to myself repeatedly in agreement with what I was reading.
In this chapter, Art introduced the concept of reducing the most complex of issues into their most basic form and tackling them from the beginning, one step at a time. He quoted C.W. Cerar saying, “Genius is the ability to reduce the complicated to the simple.”
I woke up this morning and as I do while getting ready for work, I turned on the radio to listen to the news and early morning news analysis. I continued listening in the car on my way to work and from the time I started counting, I must have heard someone or the other say the word “recession” at least 20 times. It was all that was being discussed . . . how bad the economy is, how government revenue has fallen, exchange rate this, exchange rate that.
We are presently in a position of no growth, low government income, negative balance of trade, dwindling foreign reserves, high inflation and high unemployment.
No doubt, the recession is a massive issue affecting all of us to varying degrees but as the learned amongst you readers will know, a recession is not something that happens in the blink of an eye. It’s not like snow that falls and covers the landscape overnight while we sleep or more aptly, it’s not like the harmattan winds that announce themselves on mid-December mornings when we enter the bathroom, the indicators of an economic slowdown have been glaring for over a year and no one should be surprised by it.
What is most disheartening to me about this whole economic situation however, is the fact that the present government (all arms and at all levels) has done nothing concrete to abate or reverse the situation. For all the talk pre-May 29th 2015, I expected that by now, there would be a policy statement or a concerted and coordinated framework of some sort which would stimulate growth across multiple sectors. What I’ve noticed however, are (I was going to write kneejerk reactions but that would suggest that the reactions are even timely) sporadic, disjointed, sometimes brash, sometimes timid circulars from the Central Bank, empty promises from the Presidency and Ministry of Finance, a few insightful speeches from our dear Deputy Vice President; Fash, complete absurdity from the Ministry of Labour & Productivity and absolutely nothing from everyone else.
The Moment of Decision
“In any moment of decision, the best thing you can do, is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.” That’s a quote by U.S President, Theodore Roosevelt and by his quote, he might have confirmed that the government’s strategy to guide us out of this recession is to bury its head in the sand and wish it away.
I won’t agree with statements coming from some quarters that our leaders are clueless about tackling the drivers of this negative growth, but I will agree that among other challenges, they are confused by the complexity of unravelling the tangled heap of strings that is the present Nigerian economy. We are presently in a position of no growth, low government income, negative balance of trade, dwindling foreign reserves, high inflation and high unemployment. By macroeconomic theory, this is the equivalent of conceding a penalty, two own goals and a hat trick by the opponent’s striker all in the first 10 minutes of a football match. It’s a near impossibility but if it does happens, it’s an absolute catastrophe.
What adds to the complexity is that every possible action the government could take has some negative effect somewhere else. On the monetary policy side, if they lower interest rates to stimulate the economy, they risk making the already high inflation rate even higher thus making potential portfolio investors pensive about importing their much needed Forex. On the fiscal policy side, spending our way out of recession with low interest foreign loans comes with stringent policies that put more pressure on our already battered Naira.
What the Federal Government and the CBN need to do is to take a leaf out of Art William’s book and simplify the situation to its most basic components. For all intents and purposes, Nigeria, with all its land mass, teeming population, ethnic and religious diversity, in its simplest form, is one big family. And when I think of Nigeria’s financial problems at the level of a family’s, the solutions seem very clear and straight forward. As a Personal Finance consultant, if I assumed that Nigeria were a client who has come upon some hard times financially and needs advice on a way out of his personal recession, this is the advice I would give.
A Family Scenario
Assume Nigeria were a well to do family next door (ok, maybe not next door, a family in. . . say, VGC), the picture in my mind’s eye shows a middle aged man in his early 40s with his wife and 4 kids between the ages of 15 and 5 or so. The man, let’s call him John has a decent, well-paying job. From his suit and tie, it looks like John works in a bank and I’ll bet his wife is a lawyer as she’s partial to black pant suits. The shiny, gold emblem on her hand bag narrows my assumption from lawyer to lawyer in a bank, maybe even Company Secretary. The kids go to good schools and there are cars and drivers to drop them off and pick them up. There is also something close to a 1:1 nanny to child ratio at home. The oldest child just started her A-levels in the U.K and John’s plan is for her and her siblings to complete their education over there.
In this simple scenario, Big J is where Nigeria was pre 2008. Living large on a fat salary or in Nigeria’s case, excess revenues from crude, John has bloated his recurring expenditure. It’s almost like he intentionally set out to have at least 2 of everything: 2 phones, 2 nannies, 2 drivers and 2 generators. The bills were adding up but as long as the boom days continued, John and Nigeria were all good.
Fast forward to present day. John has lost his job and just like in Nigeria’s case, the boom days are over. The harsh reality of his previous largesse and failure to save adequately have hit him hard and he now has some tough choices to make. He has some money saved up but not as much as he ought to and living on mostly his wife’s salary (private sector taxation and other revenue in Nigeria’s case), they won’t starve, but belts will definitely have to be tightened.
What I’m doing is drawing parallels between John’s family situation and Nigeria’s situation. One may be a family of 6 and the other, 180 million, but they are both families nonetheless. If John came to me for advice on how to manage his finances given his present situation, this is what I would tell him and if these solutions can work for John, they can work for Nigeria too.
Act Quickly, Act Decisively
You must have heard the phrase “Time is Money”. Well, it’s particularly appropriate when in a financial crisis. Cast your mind back to January 2016. The official Naira exchange rate to the Dollar was N197 (for those who could access it) and the parallel market rate was inching towards a record N300/$1 meaning a differential of roughly 50%. Round tripping activities were rampant even among legitimate importers and manufacturers who could make a 30% return without facing the usual business risks. There were calls for a devaluation from every analyst and economic commentator, both foreign and domestic and the voices calling for a full float of the Naira were getting louder. Where did our external reserves stand back then? A now lofty $28 billion.
Analysts estimate that at the time, foreign reverses were being depleted at an average of $470 million monthly, mostly to defend the Naira at the artificial rate. Going further bank to 2015, the CBN official figures reveal that $4.7 billion was used to defend the Naira in the first quarter of that year alone (just shy of N0.8 trillion at the N169/$1 rate back then). As of today, the “independent” Central Bank has removed the official peg and the Naira’s rate of exchange is being determined by market forces.
The key point here is, when in a financial crisis and the outlook is bleak, quick and decisive decision making can save you a lot of money. In John’s case, after careful consideration of his financial position, I would advise him to withdraw his child from the U.K school and bring her back to Nigeria as quickly as prudent. Hindsight, they say is 20/20, true. No one would have figured that the exchange rate would get this bad but imagine how much John would have spent to keep his child in the U.K for 9 months, only to withdraw her afterward. Yes, there are considerations such as which year she is and how close she is to finishing but ultimately, cutting his losses early would have freed up much needed cash for other needs ab initio.
If the CBN or the government had acted quickly and decisively in 2015 or even Q1 2016, the dichotomy between the official and parallel market rates would not be this wide and near N1trillion wouldn’t have been wasted defending a currency in a downward spiral.
In what other critical areas is our government dithering? Keeping an over bloated workforce which it is struggling to pay and will surely still be downsized eventually. Secondly, non-passage of the Petroleum Industry Bill which could release billions of dollars in investments. Thirdly, not taking concrete steps to widen the tax net to increase revenue. The approach being embarked on (the typically unimaginative approach of government) is to tax the same taxpayers more which could even slow down economic activity.
Reduce Recurring Expenditure
With his reduced income, John’s recurring expenditure will crush him if he doesn’t scale them back. I would advise him to immediately tabulate his monthly expense lines and cut or trim as many as he can bear. Employing 2 drivers and 2 nannies would cost something in the region of N150,000 – N200,000 per month. There is fat to trim here. Cutting expenses on diesel too is a no brainer.
As painful as it is, any reasonable family or business would immediately scale back expenses when faced with a shortfall in income so the case shouldn’t be different for the Federal Government especially when 70% of this year’s budget is allocated toward recurring expenses and the National Assembly budget is N155 billion (48% higher than the 2015 allocation).
One of the reasons for Nigeria’s crumbling infrastructure is that the government is involved in providing too many services to too many people and the cost is simply unsustainable. More advanced countries realized this decades ago and privatized utility companies, airports, seaports, television networks and even the post office thus freeing up much needed revenue to focus on the most vital social projects in education, health and job creation. Just as important, the freed up revenue can be used to fund initiatives that empower businesses and stimulate economic growth in all sectors.
The Federal Government needs to scale back on its workforce first and foremost. A difficult thing to do when you have labour unions that can bring the whole country to a standstill but they can learn a thing or two from Margaret Thatcher and her approach to curbing the powers and significance of the UK unions in the 1980s. Before her election as Prime Minister in 1979, even a grave diggers union strike could cause chaos and commotion.
We must start to face the reality that crude oil prices may never rise back to the $100 per barrel mark ever again. If this is the case, are we destined to remain in this state of regression forever? We urgently need to find our “new oil” or better still more than one “new oil”.
Diversify Immediate Income
As John’s monthly income has dropped drastically due to him losing his job, one of the steps he needs to take is to figure out how to make up the shortfall so as to be able to meet his immediate financial obligations. Even if he had no secondary source of income, there are opportunities to add value no matter his area of expertise of skill level.
All too often, commentators opine that the economic recession has been caused by our reliance on crude oil and not having a diversified economy but the reality is that the Nigerian economy is diversified. The oil & gas industry contributed only 6.4% of 2015 GDP.
Where Nigeria needs diversification is in government revenue. The Federal Government is the biggest spender in Nigeria, we know, but the government is at the mercy of international crude oil prices and they have hovered mostly around the $30 -$40 range for most of 2016. As 71% of money spent by the government in 2015 came from proceeds of activities in the oil & gas sector, record low prices and daily output shortfalls have had a severe impact.
Find Our “New Oil”
Depending on the outlook for John’s situation, he may need to find another proverbial financial ladder leaning on another wall so as to climb back up. High paying jobs aren’t easy to come by much these days, particularly at the higher levels of organisations. John may need to start a business or some other venture for his long term financial well-being.
In Nigeria’s case, we must start to face the reality that crude oil prices may never rise back to the $100 per barrel mark ever again. If this is the case, are we destined to remain in this state of regression forever? We urgently need to find our “new oil” or better still more than one “new oil”.
In terms of recent usage, Agriculture so far comes second only to the word recession. The private sector has got the wheels in the sector turning again but government intervention will create a multiplier effect, not necessarily by planting crops or distributing fertilizer but by providing the infrastructure such as roads and rails which have been lacking and has kept the ratio of farming output to financial return low. Nigeria has also never exploited the opportunities literally beneath our feet. Income from the vast and diverse natural resources, as far as I can remember, have never factored in our national budget.
The challenge with these sectors however is that African countries who are ahead of Nigeria in exploiting Agriculture or Mining haven’t for one reason or the other faired particularly well. One challenge is that extracting things from the ground and exporting without adding value to it is intensive but financially lucrative. A case in point is cocoa. Ivory Coast is the world’s largest producer of the stuff, with about 2 million metric tonnes. About 1.4 million metric tonnes are exported however, after cocoa is turned into chocolate and sold to you and I as our favourite brands, what the farmers get is equivalent to only 6% of the price we pay.
The real money is in turning the raw materials into something closer to the finished product. You guess it, the real money is in manufacturing. This is the next frontier for Africa. With vast land, cheap labour and raw materials close by, Nigeria could be the next India or maybe even China, after all, we have a lot in common with both countries.
The Nigerian government should privatize public corporations (which are mostly dilapidated liabilities to everyone at the moment) and deregulate their sectors. This exercise will raise revenue from the sale of assets and also from the issuance of new licenses. The success of the telecoms sector deregulation in 2001 is a shining example of the effect this strategy can have on an economy. Imagine if we could execute something similar in just three other sectors? Nigeria would be changed country. Unfortunately, what the government has tended to do is apply these windfalls towards operating expense rather than developing infrastructure which is a huge missed opportunity.
Conclusion
This is by no means an exhaustive list of solutions for our recession problem but it communicates a clear path forward based on present circumstances. It’s a three step strategy of stopping the haemorrhaging, aligning income and expenses to the new realities and moving forward with a clear plan. If these solutions can work for John, a family or even a business then Nigeria, as a bigger unit cannot be so complex that the solutions aren’t relevant or implementable. Whether right or wrong though, it’s better than doing nothing.
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