‘Greatest problem for the economy now is lack of confidence’

By Onyedika Agbedo

Prof. Pat Utomi is a professor of political economy and management expert. In this interview, he looks at the remote and immediate causes of the present economic recession in the country. Without mincing words, he blames the political class for failing to learn from past mistakes. Utomi, who founded the Centre for Values in Leadership (CVL), Lagos, suggests critical steps that must be taken to revamp the economy, noting specifically that “the biggest problem for our economy now is lack of confidence.”

There have been many accounts of how Nigeria slipped into economic recession. What in your own view caused the problem?   
When people try to analyse problems, they jump to one cause. There is no one cause to complex phenomena like this; there are many causes that built up to put us here. The first was that we failed to construct a developmental state, a state that is very focused on development. We suffered the triumph of politics. So, systematically over a long period of time, we were not bringing rigour to the business of public choice. As a result, decisions were sub-optimal in many ways, a classic example being how we deployed our earnings. Unfortunately for us, when oil became a significant factor in our earnings, we allowed Dutch disease to infect us; that is the phenomenon where the rising revenue from oil makes the revenues from traditional sector income fall because exchange rate was getting stronger and stronger. People moved from such sectors to non-tradable goods sector of the economy like working in construction companies. But when oil prices go down, we don’t pay the construction companies. The result is that the road projects become abandoned and the people become unemployed. There are series of problems that come from that. A new kind of entitlement mentality develops because free easy money was coming from a mineral commodity. That is one problem.
The second problem is that over the years, we have always known that oil is volatile; the price fluctuates. So, any reasonable person who has that kind of income track will know that it makes sense to save when the thing is in the stratosphere and then to manage better when things are down. In Nigeria, we somehow failed to learn such a simple lesson, even though we had had some really dramatic experience in that regard, classic being between 1983 and 1985. In this same country, many of us who are still alive lined up to buy sugar; we called them essential commodities (essenco). To live to repeat that experience should be an indictment on anybody who has been involved in public life. But that is what we allowed to happen to us.
In the last couple of years, the recklessness of the political leadership got so out of hand. I was on record for screaming about that repeatedly through lectures, talks and the like.  My argument that we needed to save corporately as a country almost became a refrain. Oil was only $11 per barrel when Obasanjo became president. But at a point the price began to rise; as it began to rise I also began to raise the issue. When Obasanjo then tried to respond to it with the so-called Excess Crude Account, the states kicked dramatically against that. Then we began to earn over $100 per barrel in the Jonathan years, I was also screaming.
I had suggested a few years before in a public presentation when oil price was still between $80/90, that we should have a formula for our budget process and management of receipts. That formula should require us to have three different accounts. The first $40 that we earn from oil should go into our distributable pool and that fund, the so-called FAC account, is what would go into our budget process, shared between the three tiers of government. I then argued that everything above $40 up to $70 should go into a stabilisation fund and this stabilisation fund would be invested in near money instruments, something that you can draw on if tomorrow oil prices were to crash to $10 per barrel. So, you can continuously fund the budget at $40 per barrel whether oil prices are $10 or $100. The other part of the income above $70 should go into a sovereign wealth fund or a future fund, as I prefer to call it. I made that suggestion several times at different fora. In one of such occasions, the then Finance Minister, Dr. Okono-Iweala was in the audience. When she got up to make remarks, she said that ‘Pat is right but even the small that we are trying to save in the so-called Excess Crude Account, the politicians are protesting. Some governors were saying how can we talk about saving for the rainy day when the thing is pouring torrents already.’ Pouring torrents at over $100 when the thing was $11 a few years before and you survived? It just shows the irresponsibility of our political class. And if you go to the states where all these monies went to you cannot see anything on ground. So, all these cumulated as part of the problems.
When oil prices started falling in 2014, we began to get nervous; we began to even borrow to pay salaries. On their own they were bad. But the thing that I suspect worsened it all was the arrival of a new government, which had not gotten a good feel of how things were. However, it saw the depth of the hole and the nature of the crisis, and panicked. When it panicked, it made a couple of basic errors in that you now have a balance of payments crisis that has developed because of the state of the current account. How do you deal with that? Nigeria’s balance sheet as at then was still a great enterprise if it were a business. So, there was nothing to get overly worried about except that the moment is going to be challenging because government’s revenues are challenged. Unfortunately, the panic translated to an ideological position about devaluation or no devaluation of the naira. In fact, there is no big deal in a new Head of State saying he does not support devaluation; most Third World Head of States say that. But the ideal thing to do is to keep quiet. However, the continuous repetition that we were not going to devalue suggested to the investing community, whether Nigerian or foreign, that this country was not sure of what it was doing. They became careful about exposing their hard money in the country. So, the money that should have entered the country either as repatriation of export proceeds or fresh investors, including of course hot money that flows into the capital market, all dried up. Once they dried up, what could have been a small problem became a major crisis.
What we needed do therefore was to quickly find source of cash to come into the trading account. Saudi Arabia chose to sell assets because they could afford to. In the Nigerian circumstance, I suggested that assets sales were not necessarily a better option first of all because that would be a fire sale and secondly because we have had a very bad history of transferring public assets to private hands including the current mess in the power sector.
What we should do is perhaps take some of our assets, not the great assets like NLNG. We should go for our aviation assets. Nigerian airports are so inefficiently run. We could invite the best airport authorities in the world to come and run Nigerian airports on a concessionary basis. You could say that they give us so much every year in returns and improve the quality for which you get more concession and in year-X you transfer back to us. Because the assets are now in the hands of globally accepted better managers, you can even leverage those assets and borrow against them if you want to fund your budget. If you do that, the asset is still yours, it is improving because it is being managed by better managers, and because of that you can borrow money against it and use to fund your budget. That’s what I had suggested but it was not taken. It was not a surprise to me that we ended up in a recession. What would have been a shock to me was if we did not because everything suggested where we were going.

How can the country come out of the ruins?
We just have to produce. A recession is a decline in production. So, we have to produce our way out of the recession.

What can we produce in this instance given that oil is not even selling?
There are so many things we can produce. But of course in the interim you stimulate production by spending. Now, there is this glib talk about spending our way out of recession. There is a way you would spend your way and you would do more damage because Nigeria is a country where spending can cause more problem for the economy than expand it. How? If the government says it is going to inject x-billion naira into the economy and in the manner of our politics it goes into the hands of a few cronies, they can use it to play foreign exchange game, especially since we have a very funny foreign exchange market. They can even take advantage of their power to get more foreign exchange at concessionary rate and move the money out of the country. The economy will be worse off should that happen.
But if you produce genuinely and stimulate production by putting money in the system such that everybody will get some money not as dash but as something that makes them produce, we will produce our way out of recession.
Many years ago, there was a conference in Nairobi sponsored by the Aga Khan Foundation on a tripartite approach to development in Africa. That conference produced an outcome that suggested that there are critical roles for three different sets of players in development. These three sets of players are the government sector, the private sector and the Private Development Agencies (PDAs) or social enterprises or NGO sector. If you look at the problem with Nigeria, the PDAs have been quite weak for sometime; the private sector is not as robust as it should be, so it suffers from bad sneeze from the public sector, which dominates. Now, it shows that the public sector is so critical in an environment such as this to drive the circular flows of income.
Wealth is actually created as a result of the pattern of the circular flows of income. And who are the critical players in the circular flows of income? There is the public sector, the household, the corporate sector and the external sector (the monies that come from abroad). Now, if the household is shrunk significantly such that they cannot satisfy their basics needs, the corporate are retrenching, the external sector is not convinced about Nigeria’s strategy and as such don’t know how to engage or enter, it leaves government as a major source of stimulation of these circular flows. Unfortunately, government in Nigeria, given its nature, is very dangerous. I can lead a research project, which can provide empirical evidence that given the nature of government in the last 25 years in Nigeria, government does more to prevent progress than it does to make progress happen.
Take for instance the collapse of property rights in Nigeria.  A free enterprise capitalist system thrives on property rights – the sanctity of your property. But you see government continuously violating people’s property rights in Nigeria. One person gets to power and he will cancel everything his immediate predecessor in office did. Who will invest in a country where you are not sure that the next governor will not cancel your Certificate of Occupancy?  There is regulatory capture and abuse of regulatory power in Nigeria. I know consultants who advise foreign investors; one of the pieces of advice they give is ‘please avoid any regulated sector in Nigeria’.
An Indian economist and former governor of the Reserve Bank of India, Raghuram Rajan and his colleague, Liugi Zingales wrote a book many years ago entitled, Saving Capitalism from the Capitalists. That remarkable book looks at institutions and the role they play in the advance of the capitalist enterprise. One of the critical things that institutions do is provide the frame of property rights and access to resources based on certainty of property rights. You find that Nigeria is extremely weak in that area. So, how do you expect capitalist growth to take place in such an economy? What you find in Nigeria is crony capitalism.  Those who are cronies or people that are in power extract rent and they are suddenly rich boys while those who are smarter than them and work harder than them are looking as if something is wrong with themselves. So, Nigeria has to build stronger institutions and push back crony capitalism if it is going to sustain an environment of economic growth. These are some of the things we should be watching more now than the simple issues of starting one business or the other.

You talked about government injecting money into the economy in such a way that it trickles down to the ordinary man. How can that be achieved?
I have had a number of schemes and I believe that we need to bring the PDAs sector up to be more aggressive in creating wealth. One of the things that I’m doing privately in the face of the current challenge is to create a grassroots entrepreneurial revolution. I have a number of initiatives that I’m hoping will build up to that. Here at the Centre for Values in Leadership (CVL), Lagos, we are trying to empower some young people in slum and rural areas; first with ideas about how they can be entrepreneurs; secondly with specific venture ideas they can engage in and even helping find social impact investors who can provide funding for them to move forward. We have worked with some banks to execute that in Ajegunle, Lagos, where recently we trained 100 young entrepreneurs and got support from three banks. We are trying to take it now into other states so that it becomes a country-wide programme. We are looking at other sources of partnerships to execute this. Among the sector that we are exploring in this initiative is the social sectors – health and education – that are under provided for in Nigeria. We are working to create young people who can become entrepreneurs of education and health; and we are already testing a lot of ideas.
By the time we seriously implement things like this and encourage more social enterprises to embark on schemes like this, after a while people will wonder why do we need government; we are already functioning on our own anyway. I think that only thinking like this will help us and this is why I’m focusing more and more on the PDA part of my interest at this time because ideas like this will enable us come out more quickly out of recession. That is what Nigeria desperately needs to do now.

You have just talked about what the CVL is doing in the current circumstance. What are the immediate things government can do to really get money into people’s hands?
These kinds of programmes I have talked about, there is nothing that stops government from ensuring that there is a multiplier; that it goes across the country. The CVL held a programme about two years ago with the then Minister of Agriculture, Dr. Akinwumi Adesina, now President of the African Development Bank (AfDB) in attendance. The idea that came out of that programme was to create this kind of mass awareness and begin to use technology to prosecute the ideas. Government can then go in with all kinds of out-grower schemes and support people who are now leveraging knowledge to create a revolution in agriculture. I think the government can still do that through the Ministry of Agriculture. I also think that the Ministry of Trade and Investments can come to the other side of it with their entrepreneurship extension service and create an army of people out there helping transform production in small scale manufacturing.
I do believe that if we do a lot of infrastructure projects, we will significantly advance this. There is an idea that I offered a couple of years ago that is still valid in my opinion. We have many unemployed engineers in the country. Government can bring them out, run a four-week seminar for them and then let them go and create gangs of artisans. You give each person some stretch of our dilapidated highways to maintain. The instruction should be ‘if we see a single pothole, your contract is gone. If you keep filling those potholes with your low-grade technology, this is the amount we will pay you’. If that is done, that young engineer with 20 people who work in his gang have become employed, the roads are better and we are saving ourselves from the damages caused by the dilapidated roads. Progress is taking place!
Are you suggesting that government should jettison patronising giant construction companies in the country at the moment?
There is place for the young engineers to maintain roads and a place for the big construction companies to do major construction. By the way, for the major construction works, once the government can have a strategy that communicates to the world that Nigeria is serious and knows where it is going, there is so much private capital around the world that can come in and build infrastructure in Nigeria on a build, operate and transfer scheme; or build, operate and own scheme.
Earlier in the year, I was in Australia and I got a chance to visit with the global infrastructure entity that was set up by the G-20. Their purpose is to facilitate infrastructure development around the world and they are very excited and very anxious to come into Nigeria. But who is reaching out to these kinds of hubs and pools for the country to tap the benefits?

Are there countries that have had this kind of challenge that Nigeria can learn from their experiences?
 (Cuts in) For good or for bad?
For good of course…
(Cuts in) Because if you want for bad there is one that we always behave like – Venezuela (laughter).
For good, CVL honoured Dr. Kalu Idika Kalu in one of its series. He worked for the World Bank in South Korea when the country was much worse than Nigeria. Today, it is one of the most knowledge driven societies in the world. In South Korea today, bus stops have free Wi-Fi. This is a country that was worse than Nigeria and they had all kinds of problems. They had the kind of political problems we have now, moneybags hijacking politics. Their economic development was stagnated. In one generation all of that changed. What did they do?
Their electoral commission decided that politics is now about ideas and visions; and you debate those ideas and those visions to death. You begin with street debate to classroom debate, church debate up to TV debate. The moneybags ran away after that experience and only people who have service to give began to enter the political arena. South Korea is where it is today because of it. South Korea became a developmental state where the obsessive purpose of governing is development. We have not seen that happen. The purpose of government now is ego. People who want to see the life of their children better are shoved out of the process. We saw South Korea transform; it is possible that Nigeria can do that and do that even better because Nigeria is much more endowed than South Korea.
How can the inflationary rate be controlled downwards because it’s really worsening the already ugly economic situation?
You see, the biggest problem for our economy now is lack of confidence. Many people don’t have confidence on the economy. How do you inspire confidence? First, you get a very clear game plan and begin to communicate it passionately to all the stakeholders – citizens, foreigners, investors (domestic and foreign). The game plan must be communicated with passion by people who people either trust or think they know what they are doing. This is very important. I don’t know what more I can say.

Do you think the government should change its economic team?
I don’t know if government has prerogative for who it thinks can best achieve what it wants. It’s not just a matter of people; it’s about the game plan; it’s about how they flow together. It’s about how much respect, as individuals and as a group, they have around the world.