PricewaterhouseCoopers proffers scenarios that will enable policy makers to turn around the dwindling fortunes of the Nigerian economy, including widening her tax base
| By Anayo Ezugwu | Jun 8, 2015 @ 01:00 GMT |
RESTORING fiscal credibility by widening its tax base and distributing the benefits of oil and gas resources more evenly across the entire country can help Nigeria to wriggle out of her present economic crisis emanating from the drop in crude oil prices. According to PricewaterhouseCoopers, PwC, latest report entitled: “What Next for Nigeria’s Economy? Navigating the Rocky Road Ahead,” the nation currently has one of the narrowest tax bases in the African sub-region.
The report stated that in the longer-term, Nigeria’s policymakers should aim at encouraging a more resilient economic model. They should also learn the lessons from this period and build an economic strategy fit to harness the country’s strong growth fundamentals, particularly that of a young, entrepreneurial and increasingly well-educated workforce. “Nigeria was able to navigate through the last oil price crisis in 2008 by drawing down its plentiful fiscal reserves. Today’s policy makers should re-kindle this ambition to protect future generations, learning from those commodity exporters who have successfully implemented anti-cyclical fiscal policy, such as Chile. Even under an optimistic outlook, it’s certain that Nigeria’s policy makers will face difficult choices in the short-term,” the report stated.
The government, it said must decide whether to borrow more to maintain expenditure levels, or cut back on commitments which may be politically sensitive, while the Central Bank of Nigeria, CBN, “must decide whether to draw down remaining foreign reserves to defend the exchange rate, impose painful capital controls or accept a weaker exchange rate with the possibility of losing control of inflation.”
“Furthermore, the oil price and the domestic security situation are both uncertain, presenting significant downside risks to the economic, commercial and financial landscape. We believe these critical uncertainties present a strong imperative for investors, businesses and policy makers to examine how their operations and investments will be affected in the case that the economic stress deepens – or if a severe crisis takes hold.”
In the short-term, PwC said Nigeria’s policymakers have relatively little ability to influence which scenario the country may enter, particularly relating to the oil price, stressing however, that policymakers could take actions that would help mitigate the potential impact on the economy if a crisis does materialise. On the monetary policy, PwC predicted that the CBN would need to take the lead in closely scrutinising the evolving risk environment, particularly around market, credit and liquidity risks.
“It should stand ready to intervene with a wide-ranging toolkit including extensive liquidity facilities and contingency plans for maintaining the cash money supply in regions inflicted by bouts of instability. The Government can also take responsibility for developing a set of priorities for federal and state expenditure, aligned to the national development plan. A policy principle might be to protect and support a few strategic industries during a crisis period, such as agriculture and MSMEs, who provide a large number of jobs to citizens,” said the report.
PwC noted that in Nigeria, the most prominent potential tipping points are related to the evolving security environment in response to the 2015 general elections. “We cannot tell exactly where this shock would come from; it could be a re-emergence of pockets of insurgency from Boko Haram; a return to arms for militants in the Niger Delta; an alternative unexpected event or a combination of these. Our hope is that the improving security environment continues to build steam – however the situation remains vulnerable and public and private organisations should stress-test their business plans against alternative scenarios,” PwC said.
The report further stated that market’s reaction to the unfolding events in Nigeria would be tested at various points in the debt management cycle. It recommended that financial market indices such as debt yields and equity market prices should be monitored closely around the time of large principal repayments or new issuance.
Alongside the oil price, PwC said a key economic variable for organisations looking to understand the future path for the currency was the size of the CBN’s foreign exchange reserves. According to PwC, the apex bank is likely to devalue the Naira once it breaches its threshold reserves level.
The report added that the direction of this variable could also help signal the extent of the downward pressure on the currency. “Investors who had previously sought exposure to Nigeria’s high growth potential appear to be getting nervous. Sovereign bond yields – at 17.3 per cent – hit 7-year highs in February 2015 and the NSE All Share Index has fallen over 30 per cent since July 2014. Although equities and bonds have staged a partial recovery since the election, both have underperformed emerging market peers,” PwC said.