This week, the Vice President, Professor Yemi Osinbajo, who also chairs the National Economic Council (NEC), delivered a major economic speech at a dialogue organised by the Lagos Chamber of Commerce & Industry (LLCI). The Vice President laid out the immediate economic objectives of the Government and highlighted major challenges confronting the economy as well as policy actions being taken to address these. On a general note, we are impressed by the content of the Vice President’s Speech, which was both forthright in admitting/diagnosing factors dragging economic performance and at the same time, long on solutions and policy objectives of the administration. We saw a strong gravitation towards private sector engagement in the Speech which repeatedly emphasized on the importance of the private sector. We profiled some of the key points of the Speech below.
- Fiscal Development: The FGN’s capital spending priority and non-oil revenue focus remain quite on track although both, unsurprisingly, have fallen short of target in actual terms. The Federal Inland Revenue Service (FIRS) achieved 73.2% of its revenue target in H1:2016 while Customs Revenue probably fared worse due to economic challenges in the period and FX scarcity. These, in addition to oil production shock – arising from militancy in the Niger Delta – have impacted revenue profile of governments at all levels, with sub-nationals as the worst hit. The Minister of Budget & National Planning in a presentation earlier in the week reckoned that N600.0bn in domestic borrowings (61.0% of projected domestic borrowings for 2016 budget) have been raised in H1:2016 to fund budget deficit. This is much higher than N332.0bn fund releases so far this year to cash-back capital projects, suggesting borrowings might have been used for recurrent spending in the period. However, the bright spot from the VP’s speech is that state governments are now committing to a Fiscal Responsibility Plan contingent to benefiting from N90.0bn intervention fund aimed at addressing the fiscal crisis at the sub-national level creating a drag on aggregate economic performance. Also, the FIRS has reportedly brought in additional 700,000 companies into the tax net as compared to the targeted 500,000.
- Deepening Economic Diversification: From all indications, the economic agenda of the Government to stimulate economic recovery and deepen diversification is anchored on Agricultural and Solid Mineral development. Mention was made of the administration’s roadmap to unlocking agricultural sector potential themed, “The Green Alternative”. The roadmap essentially has an import-substitution strategy at its heart with the major objective being to achieve self-sufficiency in food production.
- Structural Reforms: Structural reform achievements of the current administration have been mainly cost-saving initiatives in the public sector, including implementation of the Treasury Single Account (TSA) and Integrated Payroll and Personnel Information System (IPPIS) which pruned an estimated N8.0bn off monthly operating expenses of government, with another N14.0bn projected savings by year end to be achieved by the newly setup Efficiency Unit. The Vice President highlighted these but also suggested government is making forays into implementing more difficult reforms to ease conditions of doing business with the establishment of the Presidential Council on Ease of Doing Business.
In addition to the aforementioned, short term policy objectives were reiterated, which include amongst others: reducing fiscal and forex imbalances, boosting dollar liquidity, curbing inflation, lowering interest rate and ensuring lending to the real sector. While these are indeed pro-business objectives, belated pro-market responses to supply side shocks might have created a confidence gap in policy making, thus setting back implementation time-frame of the objectives. We are positive on the government meeting its spending goals and believe recent policy shifts from the fiscal and monetary authorities are beneficial in buoying confidence to the economy. This is crucial to ensuring access to international capital market & multilateral funding and re-igniting growth. Yet, restoring oil production to previous levels and fast-tracking structural reforms – especially in getting electricity, paying taxes, access to credit and registering property - will be key in navigating the economy out of the trough and putting it on a sustainable growth pedestal despite low oil price environment.