The Country Director, World Bank, Shubham Chaudhuri, speaks on major issues affecting the Nigerian economy.
Is the country investing enough in infrastructure to realise its potential?
Nigeria has so much potential but it has not been realised. To realise the potential, there must be investments in capital infrastructure and in basic development needs. Right now, Nigeria does not have the revenues to finance it. We have seen in some reports that Nigeria has the lowest level of government revenue to GDP among some major countries, but we have some other countries too. But if you compare them to the rule of thumb on how much the government needs to spend in order to provide the basic functions of law and order-basic services and basic infrastructure-the rule of thumb is usually between 15 per cent and 20 per cent. Nigeria, in the last few years, has been spending about 12 per cent of the GDP. It means if your revenue is seven to eight per cent of the GDP, and you are making an effort to spend about 12 per; you are already encouraging fiscal deficit which means an overall debt. However, that might be worth it if the public spending is in the right places. Nigeria has huge potential and we see this potential in two ways. Nigeria is the largest economy in sub-Saharan Africa, and you see the dynamism and the energy of the people. And if things were a bit more conducive to mobilising the energy, the potential is tremendous. I also see in it terms of Nigerians in the Diaspora-Nigerians who grow up in Nigeria and then at an individual level go abroad. In the United States, Nigerians are the most educated. It used to be the Indians but Nigeria has overtaken India in that regard.
What, in your view, is affecting the growth of the country’s per capita income?
In the last 40 years, the real per capita income has been inflation-adjusted, and per capita income in Nigeria has not grown. What it was in 1981, 1982 is what it is now in 2021, 2022. That doesn’t mean there was no time the per capita income has grown up; and most of that is related to oil price movement. But over the long run, in the last four decades, it is like four lost decades. Now the population is much higher, insecurity is much more widespread, and this year and last year, the oil price is going up. Even with what is happening in Ukraine, the oil price is no longer the boom.
How do you expect the Dangote Refinery to impact the country’s revenue when it fully commences?
Refining or the ability to refine petroleum products domestically will be great from an economic perspective – in terms of increasing domestic value-added- and will also have some job creation spillovers. It is not a solution to the physical problem of PMS subsidy, for the simple reason that it is still going to be a choice; that is if the refined products can be sold at the world price. For the refinery not to sell it at the world price, but to sell at the subsidised price, means that the government is still spending a lot. So the fiscal choice will remain and it is a choice for Nigeria to determine whether government revenues are better spent towards subsidising versus reducing the number of out-of-school children, versus reducing the number of children who die before the age of five, which Nigeria is also leading in the world. It would help on the economic front in terms of value-added.
Would subsidy have any impact on local refining of oil?
Do we want the domestic refinery, whether it is private or public, to sell PMS at a subsidised price when they could sell at the world price? The choice for Nigeria is that this state refinery could sell PMS at the world price, bringing all these revenues with them. The government can decide whether it could put that towards subsidising the PMS, or could put it on healthcare, basic education, electricity excess, and better roads. If it is a private refinery, since we have a large one coming on the line, the refinery would certainly or not be willing to sell at a subsidised price without being compensated by the government. So the fiscal choice does not go away. This is one of the things that are seen in the media where domestic refining is seen as a solution to the fiscal problem. It is not the solution to the fiscal problem. It is certainly in terms of domestic value-added, in terms of the economic benefits.
Do you expect the local refinery to bring huge benefits in terms of export?
The dependence on imports is the same thing. The dependence on import means that you are using up assets. The refineries can sell refined petroleum products globally, and by the way, the crude oil that Nigeria produces, if it goes directly to the domestic refineries, that means you are not earning FX from selling the product. So both on the foreign exchange and on the fiscal front, the choice does not go away. It is still a policy choice. If I have a domestic refinery that is producing 20 million litres a day of petroleum (PMS), I can export that at the world price, or I can sell it domestically at the world price, or I can sell it domestically at the subsidised price. If I sell it domestically at the subsidised price, that means that it is a conscious choice that I do not want to earn foreign exchange revenue from exporting, which is fine. But if you say I am going to sell it domestically at the subsidised price, you are also saying that the revenue is better used for subsidising PMS. The domestic refinery can sell at the world price, the federation gets the revenues and could use the revenues for education. So, it all comes to a choice. It is not by having the domestic refineries come online that the choice will be well. Either when it comes to FX availability or in terms of the fiscal cost, the clear benefits from the rest of the refinery are that it has huge benefits in terms of job creation and value-added. That is the reason domestic refinery capacity should be strengthened, but people think that having a domestic refinery would somehow take away the choice. You will still be losing N5tn this year in potential revenue, by abiding with the cost of PMS right now, because of where the crude oil price is. That cost will not go away because of domestic refining.
What is the implication of Ukraine/Russian war on the global economy?
It depends on whether it escalates further or continues or is more limited. The clear implication suddenly that we have seen is the rise in the prices of crude oil and gas. And I think that, for many of the advanced economies that inflation was getting ahead with, it would mean the tightening of monetary policies. It could also have some implications for global trade. In general, it could mean that the pace of economic activities globally is likely going to be a bit more moderate as being done before the crisis. My sense is that from everything that we have seen, they are likely to be more moderate than that.
What is the impact of the war on Nigeria?
Coming to Nigeria, you look at two main aspects. What it means for oil prices or energy prices including natural gas, and in terms of the willingness of portfolio investors or others to invest in Nigeria. On the global capital flows, investors’ kind of appetite in terms of investing in an emerging market is going to go down because of rates. It is not only going to be about the global market situation but also the rates in the home economies. For many of these investors, the rates will go up. So the surge for high returns, which has flooded many emerging markets, would come down. For Nigeria, ironically, that is the last of a concern because those flows were not coming in. So, the fact of Ukraine, I don’t see it having clear direct impact in that way.
Do you expect the rising oil price to have a positive effect on Nigeria’s revenue?
On the oil price, historically, in the last five decades, you will see that any time crude oil price goes up, it helps economic activities in Nigeria, just because it becomes a source of free cash flow that people spend on a lot of things. The oil sector by itself is part of a relatively small part of the economy, but the spillover is large. What was also the case in the last five decades was that high oil prices were good for the federation budget, finances, but that is no longer true. In 2021, it was not true and in 2022 it is not likely. We could be wrong, and we will be very happy to be wrong. Nigeria is having trouble on crude oil production, it is already below the OPEC quota, unable to produce the extent to which it should.
Then the fact that the price of what you are producing has gone up is not helping you that much. The larger reason is that the cost of the PMS subsidy is going up. So at $85 per barrel, NNPC was projecting that the cost of the PMS subsidy will be around N180bn to N200bn per month. In January, when the crude oil prices had already gone up to $90/barrel, $93/barrel, it has still gone up to N250bn per month. Now, you just mentioned it is about $100 per barrel, our guess right now is that we are looking at N4tn or even more a year in 2022 as the cost of PMS subsidy to the Nigerian government.
The Federal Government has postponed its plan to remove subsidy on PMS. Do you see this as the best decision now?
Two things, first, I want to emphasise that this is Nigeria’s choice. I think there needs to be a consensus among the political elite and that is to be communicated and accepted by the public. So, if there wasn’t a consensus earlier, I hope this could be a time for that, around what should be the choice for Nigeria and it has to be a consensus.
Number two, this is Nigeria’s choice. Our role is certainly not to dictate, we have no ability to dictate. With economies really, you are not meant to make a political decision. What you are meant to do is to lay out what are the cons and consequences of different decisions. So, that is what we are doing. We are just being very clear that this would come with a fiscal cost and the fiscal cost is the number, perhaps N4tn this year, and for the states, our projections suggest that the transfers they will receive from the federation may actually go down by as much as 10 per cent. This is because there won’t be enough coming into the federation account. We hope that there is a solution to this. We are working very closely with the Honourable Minister of Finance on mobilising non-oil revenue. If there isn’t a consensus about safeguarding oil revenue, at least, there are opportunities for mobilising non-oil revenues in terms of the budget support facilities.
Nigeria has continued to borrow despite its revenue challenges. What impact do you envisage from this?
I think the Minister of Finance is in a very difficult position in finance now. When you see some pressing financial needs now, you know that raising revenues will take some time. So, you feel that if you can borrow to meet those pressing needs now, it really helps to strengthen our ability to repay in the future. When we look at it, debt is not necessarily a bad thing. Look at the example I was giving, suppose the main income earner of a household falls sick, such that the income is no longer coming in. Will it make sense for that family to borrow so that they can keep their daughter in college? I will say yes, because they are investing in their daughter and the ability to repay the debt when she gets a job. Of course, it does not make sense to borrow so that the uncle can go out for good time. So it is all about the uses of debt. So, all about debt sustainability is looking at not just the volume of debt but what it is being used for. From that perspective and what we have seen, Nigeria is trying at least at the federal level to really make sure that the debt is used for the right things and a big part of that is being very transparent. So, we work very closely with the government. Not just the government but the public at large can decide whether this is something that works.