Thread by @MoghaluKingsley

Thread: Kingsley Moghalu’s Statement: Nigeria’s Covid-19, Oil Price Crash and Fiscal Crisis Calls for a More Fundamental Response.

A combination of the Covid-19 pandemic and the crash in oil prices has created a perfect storm for Nigeria’s economy- which was already fragile even

before Covid-19. I believe the Government and people of Nigeria should seize the moment to commence a far-teaching restructuring and repositioning of Nigeria’s economy.

I make this suggestion based on my strong view that our 100 countrymen and women who live in extreme poverty, giving us the title of “poverty capital of the world” are not poor because we lack intelligent economists. Nigerians are impoverished by their country’s politics,

politicians, and by its unworkable constitutional structure which creates perverse incentives to ensure the country is locked into the resource curse of oil.

The Federal Government of Nigeria borrowing $3.4 billion from @IMFNews under the Fund’s Rapid Financing Instrument program and seeking another $3.5 billion from the @WorldBank and @AfDB_Group WITHOUT structural economic and constitutional reforms, in an age of declining oil

revenues, is to postpone the evil day. Our country’s moment of reckoning has arrived.

The fundamental problem is: our extreme reliance on oil for revenues, no fiscal savings, and unwillingness to cut the bloated costs of governance and restructure Nigeria constitutionally to

make its economy more productive, cannot be solved by borrowing for balance of payments.

We need more than $7 billion to solve the balance of payments challenge, but that is not the point. If, as is likely, oil prices remain low for some time, this is just bandaid.

With these loans, our reserves position may improve temporarily. @cenbank will restart intervention to create artificial strength for the naira, and those who don’t understand the fundamentals of economic transformation will think we have overcome our problems.

We also need to be mindful of a further implication of the many loans @NigeriaGov seeks to take: borrowing so much without a real source of revenue to repay will likely result in a sovereign debt crisis.

While we are told that our ratio of debt to our GDP is a moderate 21%, the more relevant ratio is that of revenue to debt servicing which is in the region of 60% or more. This means, simply, that nearly two-thirds of our country’s revenues go to debt servicing.

Nigeria is entering a dangerously vicious cycle.

We need to re-incentivize the economy to be productive. The surest way to do so after the Covid crisis subsides is to wean ourselves of oil dependence by commencing a constitutional restructuring that devolves far more powers to regions (not states, many of which aren’t viable

on their own) so they can make use of the economies of scale to create viable regional economies.

In the meantime, if and when the oil price returns to $40 or above, @NigeriaGov must enter into hedging contracts to protect our oil price at a “floor” price regardless of the fluctuations of the market.

In a hedging contract we would lose the upside on a price surge but secure a floor of revenue below which we cannot fall. Since it is unlikely oil will return to the $133 price level that would be required to balance our budget, the potential loss of oil profits doesn’t matter.

Mexico, which has deployed hedging as a risk management tool to protect its fiscal revenues from oil price fluctuations, has made a $6 billion windfall in the current oil price crash. That’s almost the $7 billion @NigeriaGov is borrowing from international financial institutions.

In any case, the Covid-19 crisis will see oil prices depressed for several months because the global economic recession it will entail will see demand for oil remain depressed because of decreased productivity in the national economies of industrialized countries.

So, the hedging proposal is simply a holding pattern until we diversify our economy by restructuring its political foundations.

In the meantime as well, the federal government should deploy at least $500 million of the RFI from the IMF to the establishment of a a venture capital fund (NOT credit funds such as @cenbank has established) to provide EQUITY capital to unemployed youth (with a skills training

component), urban slum and rural unemployed citizens to ster new, small and micro business ventures. The fund will be a co-owner if the businesses in order to ensure return on investment and corporate governance.

This venture capital Fund should be run by the private sector based on a PPP arrangement and transparent guidelines that guarantee equal access to qualified Nigerians in all parts of the country.

From the Covid-19 palliatives debacle,the Nigerian authorities lack the infrastructure and capacity to run an efficient and effective country-wide program of such magnitude & potential impact.This is necessary to stimulate the economy and address increased unemployment from Covid

In conclusion, Nigeria should prepare for and take the following steps immediately after the Covid crisis:
1. Deploy $500 million from the $3.4 billlion IMF loan to boost employment and sustainable wealth creation for the extremely poor and the unemployed through a venture fund.

2. Commence hedging contracts on the price of oil as soon as the oil price recovers to a level that makes this a viable option.
3. Drastically reduce the costs of governance.

4. Ensure that the 2021 budget allocates not less than 15% of the budget to health and education respectively. This allocation should be for capital investments and reforms, not recurrent expenditure.

5. Restore fiscal savings through an oil price rule that determines a percentage of oil revenues that must go into a savings fund.

6. Convoke a constitutional conference to prepare a framework for a new constitution that restores Nigeria to genuine federalism based on six or more geopolitical and geo-economic zones.

#Ends.