Is Nigeria Cursed or Just Incapable Of Better Policies?

“The worse decisions ¬†a fragile economy like Nigeria with no concrete evidence of why it grows other than its population size can make is price fixing and market control” Rebecca Enobong Roberts, 2016ūüôā

In September, African Development Bank (AfDB) president Akinwummi Adesina at a Nigerian businesses forum in Abuja said Nigeria was too big to fail. Noting that similar oil exporters such as Angola and Equatorial Guinea faced similar challenges.

The AfDB President said it was important for the private sector to take advantage of the incentives that should accompany the devaluation of the local currency, the naira, to boost production, especially in the agri-industrial sector.  In theory, the right direction for Nigeria will be what the AfDB president suggested, but in practice, taking these advantages require incentives only the government can create.

From FX stringent policies, data price increase, passport taxes to price fixing, everything the Buhari administration is doing is going in a direction opposite of where an economy in crisis should be. If the government had allowed the inevitable; the Naira free fall since last year September, the Naira would have been on its way to recovery by now.

 

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Is Nigeria curse or Buhari incapable of sound policies?

 

It is no rocket science, FX of a consuming economy is solely dependent on demand and supply. If oil income is low, businesses are struggling to cope and foreign investment is the decrease, restricting the flow of FX of a country that produces nothing but reliant on imports is an unintelligent and dangerous decision.

The first rule of managing an economy in crisis is creating incentives for free markets. Presently, every step this government is  taking at this critical moment is self-destructive and rent seeking. Which leads me to ask; Is Nigeria curse or is the Buhari administration  just incapable of backtracking from the economic mess it is creating and making better choices?

Africa and the world cannot afford for Nigeria to fail. Howbeit, that is exactly the direction Nigeria is headed; failure and it is Nigeria’s fault. The economy is at a 1.7 % shrinkage, unemployment has more than doubled the rate of the last two years, inflation is the highest its been in the last 11 years.

Empirical Problems and Implications

It is obvious that although the Naira was eventually devalued in June 2016, the president is still obsessed with defending a factor (Naira) he has no control over and allowing factors (policies) he has control over to be shaped by the directions a chaotic economy. Further exposing Nigeria to extreme economic vulnerabilities.

The president through the CBN is manipulating the exchange rates, restricting banks access to free flow of FX. As a result, discouraging foreign investment, FX shortage, killing businesses that depend on importation and feeding the FX black market.

As things get out of hand, instead of creating an FX open market, the government through the Department of State Services (DSS) is forcefully clamping down on the same black market monsters it has created. More stringent control at play.

Relinquishing control of Nigeria’s foreign exchange will doubtless cause at least a short-term rise in inflation , yet from a holistic perspective, it is exactly what needs to happen urgently. Doing so will not only draw foreign investments back into the country but it will also make the economy more productive and competitive, but also cut off a conduit for corruption.

Further, the Nigerian Communications Commission’s (NCC) announcement that the cost of data will triple from December 1st makes no sense for a country that people are already struggling to survive with pay cuts and increasing unemployment rate; sending more middle-class¬†back to the poor demographic. The danger of creating pro-poverty policies is that¬†on the one hand, ¬†it falls on a desperate need to reduce poverty now and on the other hand, making the challenge even harder to overcome.

What the government should do instead is shield the middle-class ¬†and cushion the blows for the countries‚Äôs poorest and most vulnerable by seeking other means to raise funds internally; curtailing the cost of running the government, cut senator’s bogus allowances and making better usage of returned loots until the economy kicks off again.

In this hard times, it should be a priority to keep more businesses afloat and create shocks to hold things together from getting worse, as recovery becomes harder if the situation keeps deteriorating.

It is better for more businesses and individuals to pay taxes than for more businesses to shut down and for government out of desperation seek to increase taxes.¬†This same framework could also shield the poor from the regressive impact of an increase in Nigeria‚Äôs value-added tax — which is relatively low and should remain low until governances and services delivery improves, but a potentially valuable source of additional government revenue.

The saddest part about NCC increase in data tariffs and taxation increase proposal is that such revenues will be used to pay the salaries and allowances of incompetent civil servants and their bogus and unnecessary special advisers. It is callous and abusive for the Nigerian government to seek to increase tax rates and data tariffs for a struggling population who benefit nothing from the government.

Evidently, former president Goodluck Jonathan’s style of managing the economy meant that things were inevitably bound to get worse. ¬†Yes, Buhari inherited a Nigeria that although was prospering, oil price declines, looting and corruption meant that a recession was a matter of not “if”, but “when”. However, his controlling and rigid method of handling the economy has made the economic crisis harder to manage and solve.

In conclusion, things are already at a climaxing bad state, the only way 2017 will be a better year economically for Nigeria is if Buhari sees the need to relinquish control, create better policies that allow the market a free flow and back-tracks on trying to sacrifice the poor so that government can generate revenue.

 

 

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Five Reasons Why Buhari’s Unemployment Benefit Won’t Work

In the usual Nigerian politics manner of making idealistic promises during election campaigns and going back on it after the win, president Buhari or the ruling party APC (depending on personal understanding of who said what and what it meant at the time), a promise was made that all unemployed youths will be paid N5000 monthly. In April, the President said in an interview, that the promise to pay unemployment benefits was his party APC’s idea and not necessarily an idea he agreed with.

 

Street Trading in Lagos

The president said ‚Äúthe largesse N5,000 for the unemployed, I have got a slightly different priority. I would rather do the infrastructure, the schools and correct them and empower agriculture and mining so that every able bodied person can go and work instead of giving N5,000 monthly to those who don‚Äôt work‚ÄĚ. ¬†

Looking at Nigeria’s current economic state, the monetary policies are feeding more job loss, states are being bailed out by the federal government to enable civil servants salary payment. Clearly, the country has more pressing priorities. However,  not to throw away the baby with the bathwater, unemployment benefits can be a good has the capacity to improve livelihood. But the question is even if Nigeria had the financial capability, is it still a good idea? Does Nigeria have the capacity to target the right beneficiaries and a system that maximises benefit schemes to achieve intended goals (improving livelihood)?. What are impact indicators?

 

Nigeria’s unemployment rate has been on a steady increase since 2009. Then, the rate of unemployment was 19.9 percent, but it hiked to 21.1 percent in 2011, and 23.9 percent in 2012. However, from 2012 to 2014, there was a significant decline in these figures; unemployment rate plunged to 9.7 percent from 23.9 percent. Nigeria with the average age of 35 years, has a large youth population, this means that the youths are most affected by the issue of unemployment. It is therefore, no surprise that the current rate of unemployed youth stands at over 50 percent, a situation that is clearly detrimental to the country’s economic growth and overall development.

During a press conference late last year, President Buhari stated that the fulfilment of his campaign promise of a  N5, 000 monthly stipend to every unemployed Nigerian citizen was in the works and that the implementation of the unemployment benefits scheme would begin early this year. He also said that the country had in the past, wasted its resources, and it was time to focus on investing in the most important resource of any nation Рhuman resources.

Currently, the number of unemployed people in Nigeria is stated to be 25 million. But with the recent increase in job loss, coupled with the government’s inability to create jobs, this statistic does not seem an accurate reflection of reality. The unemployment benefit scheme will cost the Nigerian government N125 billion monthly; that is N1.5.trillion annually. Considering the current economic uncertainties, and the static nature of the economic policies by the present administration, is Buhari’s N5, 000 monthly stipend feasible? How will it be funded? And is there an interim exit plan for when the project term expires?

The cost and other restraining factors of this project do not negate the positive impact it could have in enhancing the livelihood of the millions of Nigerians living in absolute poverty. But from all indications, it does seem like the Nigerian government is ill-equipped to handle this sort of project. Moreover, the complications surrounding the 2016 budget begs the question of priority and provision for this project right now. The nature and framework of such benefits are such that it is practicable and most efficient in functional societies, as it can only be successful if it is built around a long-term goal.

Countries such as Sweden, Denmark and Norway, pay unemployment benefit to people who have worked for over 52 weeks within the last three years. This payment is made for six months while the beneficiaries are actively seeking employment. In Switzerland, beneficiaries get paid full benefits for 8 months, as long as they can prove that they are registered with job centres and are actively seeking employment. In these countries, the framework for these schemes is market driven, as they involve voluntary enrolment and are funded by taxes and government subsidies.

The intricacies of unemployment benefits are such that their planning, implementation, and success are highly data driven and funded by labour, insurance taxation policies, or both. For example, in Denmark, all workers contribute $700 annually to cover social programs for which unemployment funds are part of, but not all workers are eligible to claim the benefit should they be out of employment.  

In South Africa, the unemployment benefit is paid through the Unemployment Insurance Funds to people who lose their jobs and are unable to get a replacement. These persons are allowed to apply within 6 months of becoming unemployed and are able to receive payment for up to 34 weeks. They must also undergo various stringent methods of self-identification. This process of identification still poses a challenge in advanced economies, how much more in a developing country like Nigeria.

In December 2015, the Nigerian senate voted against this scheme on grounds that it was open-ended, and that the government had no concrete means of screening and identifying potential beneficiaries of the scheme. The senate argued that such a scheme was susceptible to abuse due to the country’s constant struggle with data and biometrics. Also, this sort of project is grassroots-driven; the government’s inefficiency at this level could also pose a major challenge to its success.  

Here are five reasons Nigeria has no business embarking on such projects.

In addition to the country’s present state of economic uncertainties, here are reasons why the unemployment benefit scheme is not feasible for now.

  1. ¬†¬†¬†Sustainability: ¬†It is common practice for the Nigerian government to copy foreign initiatives that are at work ¬†in the US, the UK, or China, without proper thought and analysis based on the country‚Äôs realities. Because Nigeria has no tangible long-term goals; a sectionalized 20 years development plan, there is usually nothing to measure these irrational decisions against. While imitating these western countries, some of the basic questions the government should ask is; is this an investment or a liability? How will it be funded? If it’s an investment, what are the expected outcomes, and how will these outcomes be measured? There is also the question of the project duration and its interim exit strategy.
  2.    Increased Debt: The controversies surrounding the bloated nature of the 2016 budget, and the lack of other alternatives, will see the government having to incur more foreign debt to finance the unemployment benefits scheme. For Nigeria’s continued growth, it needs to enhance its capacity to grow; this involves human capital contribution to economic activities. However, it appears that the implementation of this scheme would breed liabilities Рdependency on handouts. The last thing the country needs is incurring debt to create liabilities.
  3.    Lack of a National Database: Presently, Nigeria’s total population is uncertain; how many children are born daily? How many out-of-school children are there? How many people are actually unemployed, or underemployed? And what is the difference between underemployment and unemployment? Some statistics quote the unemployment rate at 25 million, while others place it at 30 or 40 million. How does the government plan to cope with this varying statistics? And how will unemployment and underemployment be differentiated?
  4. ¬†¬†¬†Population Politics: The unemployment beneficiary scheme will breed room for corrupt practices such as the creation of ghost citizens; there is a general assumption that many states in Nigeria have ‚Äėghost citizens‚Äô used for political and budget manipulation. For example, there is an argument that Lagos state is the most populated in the country, while others say it is Kano state. Again, this reinforces the irregularity of the country‚Äôs data statistics, which appears to be based on speculation. If the government cannot ascertain the population of states in the country, then the unemployment scheme is doomed to fail.
  5.    Lack of functional smaller governments: Another challenge to the success of this project is that it will leave many behind as the Nigerian system has major efficiency challenge at the local level. Initiatives of this nature often thrive when it is driven and implemented at the grassroots, and by the local government. However, the framework of the Nigerian government and politics is such that the authority of the local government is restrained and therefore has very little capacity to handle a capital-intensive project of this nature.

Analysis of the possible reasons that aided the reduction of unemployment rates between 2012 and 2014, what quickly becomes apparent is that during this period, the Nigerian economy witnessed the birth of new industries, with a quite a number of new and emerging entrepreneurs. This sheds light on the power of free market economies and its capacity to birth alternative or informal sectors in Nigeria. 

Howbeit, recently in Lagos state, governor Ambode endorsed the enforcement of criminalising street hawkers. Global experts have projected the informal sector to be the new driver of Africa’s growth. For Lagos state, what this means is; rather than ban street hawking, finding ways to regulate and license makes more sense.

That way, the government is not pushing uneducated and vulnerable Nigerians into the unemployment market when graduates are struggling to find jobs.  The logic is that street hawking is not an obstacle  to overcome in building a mega-city but  an intricate part of keeping poverty level low. Also, until a government can provide for itself people, the basic needs, it has no right to take away their source of livelihood. Doing so obstructs the balance of reducing  the absolute poverty rate in Nigeria. 

Further, in an economic crisis such as Nigeria without the availability of basic human needs, it makes no economic sense to kill any form of informal income earning activities.  A meaningful step for the government to take is to build structures around the alternative sector and render its maximum support through intentional policies. For obvious reasons, the current economic realities require prioritising investments as well as supporting and maintaining all forms of economic activities to boost the economy and not create more liabilities.

The Nigerian government must avoid the trap of breeding dependency and focus on harnessing human capital, which in turn will contribute to economic growth. The government should harness investment opportunities for better policies that support growth by removing all obstacles to all income generating activities and the free market. 

 

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How Nigeria Can Navigate the Current Economic Uncertainities

IMG_1652When an economy is distressed, exchange rates become volatile and countries rush to stem potential risk. What risks should countries in this scenario mitigate ‚ÄĒand how?

The reduction in oil price has brought exchange-rate risk back to the forefront in Nigeria; creating foreign exchange instability which has seen the nation, an import-dependent economy continually spending more while generating little foreign exchange income. This has left the economy in a vulnerable state.  More often than not, nominal exchange rates tend to draw the most  attention to the less volatile factors which when touched, has the potential to create major vulnerability in an economy.

In theory, when commodity prices are falling as local currency values were rising, purchasing power would stabilise due to cash inflows, and there would be no real foreign exchange risk. However, in Nigeria’s case, the crash in oil price and the little generation of earnings in foreign currency has created a huge imbalance. Nigeria spending more foreign currency on importations and earning less foreign currency; creating a deficit. Along with this deficits are obvious risk but tend to be misleading factors, demanding immediate interventions, which creates a chain reaction of more erratic risks.

Many developing nations, when faced with this challenges tend to rush to managing the visible risks immediately. For example, micro-managing FX transactions, pegging the Naira, currency swaps, trying to control currency futures and options. Such tactics often negate longer term views as they act as temporary solutions to underlining severe and more permanent issues . These kinds of risk mitigation would down the line see Nigeria face greater exposure to the less obvious risk that is more challenging to manage and these risk may in the nearest future become unmanageable.  For example, trying to manage a risk which stems from a mismatch between cost and investments in one currency and revenues in another will create risks which are initially difficult to forecast.

Understanding where and how foreign exchange fluctuations affect the nation’s cash flow is not a straightforward case and no amount of research can accurately prevent risk likely to arise. Various factors from macroeconomic trends to internal competition within market segments determines how foreign exchange rates affects the economy. While economist use mathematical risk-management tools in analyzing risk, development economists lean more towards understanding where and how exchange rates can drive or derail the economy. Each of these arising risks will influence cash flows and value in various ways, thus, requires context-specific approach in risk mitigation.

Presently, Nigeria has already made some economically¬†unintelligent¬†decisions by rushing to manage immediate risks that were apparent as soon as the shift in commodity pricing occurred. There are no easy ways to undo these decisions, so the only viable option is to ensure that things don’t get out of hand. Here is how;

Take a holistic perspective

Foreign exchange risk should not be managed in isolation of intense policy research, as doing so could trigger more hazardous risk. For example, if Nigeria is borrowing and signing a loan $6bn deal with the IMF today for 2017, it should consider buying the loan required today and enter a forward contract for a fixed rate whereby, changes in exchange rates does not affect repayment rate. Understanding where and how foreign exchange risk triggers one another in a vulnerable economy is crucial for effective mitigation of these risk.

Focus on cash flow, not earnings

Often times, the country’s accounting report fails to draw attention to the most important aspect of currency risk; cash flow. For example, the nation’s reserve contains information¬†on FX gains and cumulative adjustments from translating foreign currency- designated assets and liabilities without separating assets from liability in the final analysis; when the¬†focus¬†is placed on earnings it negates cash flow activities, and cash flow is the truest reflection of reality.

Additionally, it is common for¬†economist to look at just numbers in financial report, ¬†the most vital effects of changes in currency rate comes from structural risk analysis. As a matter of fact, standard financial reports often lead analysis to misleading conclusions about a nation’s reserves by overstating the accounting impact on incomes earned as opposed to the real effect of cash flows. ¬†The finance ministry should focus on the potential risk created by spending more than what is going into the reserves.

Secondly, it is common for commodity-dependent nations to struggle whenever there is a negative shift in commodity price, however, it is wise for a government in such scenarios to avoid the temptation of try mitigating all of the risks that are induced by shocks in commodity prices.

Furthermore, the main reason why mitigating obvious risk in this scenarios is a given is such risks are initially very obvious creating a panic that requires immediate actions. However, mitigating the risk more often than not create a chain reaction of more harmful risks that were initially less obvious. For instance, price fixing, currency pegging and control are ideal when oil price makes a free fall from $89 to $37 per barrel, what is not considered in such decisions making process is the chain reactions it is likely to create in the macro economy that will overflow negatively into the entire economy.

Fourthly, the current economic condition of price fixing and FX irregularities shows that the Central Bank of Nigeria(CBN) is the main driving force in economic policy making and this should not be so. Central banks are banks regulatory body and because they are market driven, being that a market-driven approach to managing an economy is more often that not shallow and is hardly based on real research on longer-term development goals, a Central Bank should under normal circumstances only act as a support to the finance ministry and not the other way round.

In conclusion, Nigeria should be able to stabilize and possibly grow the economy if the finance ministry with the appropriate support of the CBN takes a holistic approach that focuses on the effects of cash flows than on earnings and be fully adverse with the limitations of financial instruments and how to use them to the nation’s advantage. Both the finance ministry and the Central Bank of Nigeria should be transparent with each other about the risk they face and strategies developed to hedge these risk.

 

 

 

 

 

 

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How Nigeria Should Navigate Economic Uncertainties

IMG_1652When an economy is distressed, exchange rates become volatile and countries rush to stem potential risk. What risks should countries in this scenario mitigate ‚ÄĒand how?

The reduction in oil price has brought exchange-rate risk back to the forefront in Nigeria; creating foreign exchange instability which has seen the nation, an import-dependent economy continually spending more while generating little foreign exchange income. This has left the economy in a vulnerable state.  More often than not, nominal exchange rates tend to draw major attention the less most risks, which when touched, has the potential to create major vulnerability in an economy.

In theory, when commodity prices are falling as local currency values were rising, purchasing power would stabilise due to cash inflows, and there would be no real foreign exchange risk. However, in Nigeria’s case, the crash in oil price and the little generation of earnings in foreign currency has created a huge imbalance. Nigeria spending more foreign currency on importations and earning less foreign currency; creating a deficit. Along with this deficits are obvious risk but tend to be misleading factors, demanding immediate interventions, which creates a chain reaction of more erratic risks.

Many developing nations, when faced with this challenges tend to rush to managing the visible risks immediately. For example, micro-managing FX transactions, pegging the Naira, currency swaps, trying to control currency futures and options. Such tactics often negate longer term views as they act as temporary solutions to underlining severe and more permanent issues . These kinds of risk mitigation would down the line see Nigeria face greater exposure to the less obvious risk that is more challenging to manage and these risk may in the nearest future become unmanageable.  For example, trying to manage a risk which stems from a mismatch between cost and investments in one currency and revenues in another will create risks which are initially difficult to forecast.

Understanding where and how foreign exchange fluctuations affect the nation’s cash flow is not a straightforward case and no amount of research can accurately prevent risk likely to arise. Various factors from macroeconomic trends to internal competition within market segments determines how foreign exchange rates affects the economy. While economist use mathematical risk-management tools in analyzing risk, development economists lean more towards understanding where and how exchange rates can drive or derail the economy. Each of these arising risks will influence cash flows and value in various ways, thus, requires context-specific approach in risk mitigation.

Presently, Nigeria has already made some economically¬†unintelligent¬†decisions by rushing to manage immediate risks that were apparent as soon as the shift in commodity pricing occurred. There are no easy ways to undo these decisions, so the only viable option is to ensure that things don’t get out of hand. Here is how;

Take a holistic perspective

Foreign exchange risk should not be managed in isolation of intense policy research, as doing so could trigger more hazardous risk. For example, if Nigeria is borrowing and signing a loan $6bn deal with the IMF today for 2017, it should consider buying the loan required today and enter a forward contract for a fixed rate whereby, changes in exchange rates does not affect repayment rate. Understanding where and how foreign exchange risk triggers one another in a vulnerable economy is crucial for effective mitigation of these risk.

Focus on cash flow, not earnings

Often times, the country’s accounting report fails to draw attention to the most important aspect of currency risk; cash flow. For example, the nation’s reserve contains information¬†on FX gains and cumulative adjustments from translating foreign currency- designated assets and liabilities without separating assets from liability in the final analysis; when the¬†focus¬†is placed on earnings it negates cash flow activities, and cash flow is the truest reflection of reality.

Additionally, it is common for¬†economist to look at just numbers in financial report, ¬†the most vital effects of changes in currency rate comes from structural risk analysis. As a matter of fact, standard financial reports often lead analysis to misleading conclusions about a nation’s reserves by overstating the accounting impact on incomes earned as opposed to the real effect of cash flows. ¬†The finance ministry should focus on the potential risk created by spending more than what is going into the reserves.

Secondly, it is common for commodity-dependent nations to struggle whenever there is a negative shift in commodity price, however, it is wise for a government in such scenarios to avoid the temptation of try mitigating all of the risks that are induced by shocks in commodity prices.

Furthermore, the main reason why mitigating obvious risk in this scenarios is a given is such risks are initially very obvious creating a panic that requires immediate actions. However, mitigating the risk more often than not create a chain reaction of more harmful risks that were initially less obvious. For instance, price fixing, currency pegging and control are ideal when oil price makes a free fall from $89 to $37 per barrel, what is not considered in such decisions making process is the chain reactions it is likely to create in the macro economy that will overflow negatively into the entire economy.

Fourthly, the current economic condition of price fixing and FX irregularities shows that the Central Bank of Nigeria(CBN) is the main driving force in economic policy making and this should not be so. Central banks are banks regulatory body and because they are market driven, being that a market-driven approach to managing an economy is more often that not shallow and is hardly based on real research on longer-term development goals, a Central Bank should under normal circumstances only act as a support to the finance ministry and not the other way round.

In conclusion, Nigeria should be able to stabilize and possibly grow the economy if the finance ministry with the appropriate support of the CBN takes a holistic approach that focuses on the effects of cash flows than on earnings and be fully adverse with the limitations of financial instruments and how to use them to the nation’s advantage. Both the finance ministry and the Central Bank of Nigeria should be transparent with each other about the risk they face and strategies developed to hedge these risk.

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Harnessing the Informal Sector for growth in Nigeria

Lately, many African nations have experienced the Africa rising revival, however, it has not necessarily created decent jobs to accommodate the nation’s growing population. Deepening unemployment crisis remains a huge plague African government are caught up with trying to mediate through various interventions, that is yielding insufficient impact. What this could mean perhaps, is that a government should not be trying to create jobs but rather, focus on enabling freer markets, creating and implementing better policies and providing infrastructure to support the process of job creations.

Interestingly, African countries pay very minimal attention to the role the informal sector plays in fostering growth ‚ĒÄ creating new alternative industries that brings stability for young people who would have otherwise been unemployed, to create earn a living and create jobs. For example, the sudden growth in the Nigerian entertainment and technology industry has given birth to new crops of ‚Äúinformal entrepreneurs‚ÄĚ in the social entrepreneur and tech-prenuership sector.

The power of those who earn a daily or informal income cannot be undermined as, as African Development Bank in 2013, reported that 55% of Sub-Saharan Africa‚Äôs GDP and 80% of the labour force is informal sector driven. Nine in ten city and rural dwellers including those in the formal sector have an informal job as a means of support to earn a living or supplement the formal earnings; in Nigeria, it is called a ‚Äúside-hustle‚ÄĚ and majority of this sector‚Äôs employees are young people and women demographic.

The growth of the informal sector in Nigeria like in most African countries stems from government failures and the hidden opportunities that become available when governments fail. Although the informal sector is an avenue to create a reasonable source of livelihood for many, it has a lot of challenges and often faces opposition from monopolized vested interest and sometimes government agencies. It is also without income security and other benefits that are inclusive in the formal employment framework.

In Nigeria, 80% of the formal sector’s employee particularly, of the banking and telecommunication sector is temporary staff. As such, they do not enjoy the perks of income security, health and other social benefits available. These informalities more often than not overlap poverty in both formal and informal sector employees in Nigeria.

Factors explaining the informal sector growth in Nigeria

The proliferation of the informal section is often associated with the growing poverty rate and weakness of economic conditions to create jobs. According to African Development Bank, advance and middle-income economies have smaller informal sector opportunities because things already function as they should.
Citing that the vast opportunities are available in poorer countries and there is a need for informal sector development, as the lack of an organised system would mean that there are opportunities to create jobs and more income as opportunities were laying around in the challenges needing solutions.

Employers of labour in the informal sector have an advantage in some in a way, because of cost reduction related to permanent wages, retirement pensions and other social benefits of formal employment. For example, for a non-profit, hiring, a small and independent consultant to handle its project structures and fundraising strategy for a period of time, seems a better alternative than a permanent candidate for the position.

Besides, poverty and social security, the growing increase of informal sector activities are closely related to a society characterized by weakness in three main institutional scopes; taxation, regulation and private property rights.

Taxation bureaucracies and the complicated fiscal process are preventing the informal sector operation from transiting from informal to formal activities. Which also means the government is losing a lot of money it would have otherwise generated in tax revenues. The lack of structure, support and the complicated requirements associated with business legalization is also a huge barrier facing such transition.

Further, limited or no access to capital is a vital constraint for people working in the informal sector. The fact that informal sector activities are more often than not, a means to an end and not a choice, makes this challenge even more grievous.
Therefore, the sector participants often lack necessary skills, education and training which could become major impediments to growing these sorts of businesses to a more formal structure.

Other factors such as limited access to technology, lack of power and all round poor general infrastructure makes the informal sector operation a huge challenge. Due to its contributions to the economies and its potentials, informal sector development plans should be inclusive in all African nations’ development agendas.

Harnessing Nigeria’s Informal Economy

Recognizing, supporting and organizing the informal has a vital role to play in job creation and economic growth. As the profitable activity create a lot of stability and maintains sanity in the labour market. With the current economic state in Nigeria, proper informal sector regulation, development and support, could be beneficial to the economy.
This could be done by raising government awareness, fostering the availability of information on the sector and the removal of the bureaucratic processes that impairs growth and expansion of this sector.

Government Awareness: Going by the statistics, the Nigerian government is losing a lot of money in taxation in the informal sector. Government and policy-makers should recognize the importance of the informal sector and the role it plays in the economy.

Associating the sector to illegal endeavours or as something that should be destroyed in an attempt to building mega-cities will not create the amount of jobs needed to absorb the growing unemployment population.

There is a need for policies to be coordinated and for strategies to be implemented to render support to the sector in the process of formalizing the sector to be organised, better regulated and taxed.

Further, effective regulatory framework, better governance, better services, improved business environment and improving access to finance, power, technology and infrastructural development will be essential to easing the process of such transition.

This will also require promotion of social protection and support to small to medium size businesses, which accounts for a large percentage of the country’s informal sector. However, the government and policy-makers must be aware of and sensitive to the heterogenic nature of this sector.

A recent study on West African economies suggested that government in dealing with the informal sector should differentiate between the various (small, medium, large) classes informal firms, as implications of policies affect them differently.

The large informal sector organisations play a more significant role in the economy, in comparison to the small and medium ones. As such, specific policies should be adopted that brings informal firms into formal regulation by creating systematic approaches which will determine and monitor what class of the informal sector begins paying taxes and when it should transition to the formal sector.

Access to Financing: Limited or no access to financing facilities is one of the major factors responsible for the impediment of this sector. Facilitating access to better credit and financing channels such as low interest and less complicated application process of micro-credit is a necessary step to encouraging informal activities to transition to the formal economy.

Access to Information: Because the informal sector has been neglected and ignored by the government for so long, this has meant that there is little or no knowledge or information available for this sector. For example, the activities in this sector are often invisible and untraceable in official statistics.

For the better analysis of the sector and its contribution to economic growth and its impact, it is important that data is gathered and maintained for analysis and to better understand the working conditions, economic and employment impact of the informal sector.

In conclusion, the informal sector activities should not be seen as an obstacle to overcome in the process of economic growth, but rather, an integral part of the solution to Nigeria and Africa’s economic drought, particularly now.

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Nigeria needs to hands-off Macroeconomic Policies

The current complicated nature of macroeconomic conditions in Nigeria is putting a lot of pressure on Nigeria’s growth prospects. Granting, the oil price decline is largely beyond Nigeria’s control,  governance, and management crisis are deepening with the 2016 budget fiasco, the frequent Central Bank of Nigeria regulatory changes and the policy directions uncertainty.

These domestic ‚Äúwrong moves‚ÄĚ are avoidable. However, irrational and haphazard policy decisions are leaving foreign investors confused, and businesses struggling to survive in a volatile economic environment.

In times of economic vulnerabilities, it is normal that citizens are expecting their government to intervene with measurable and practical interventions ‚ĒÄ as the ability to maintain market stability becomes one of the things beyond government control in turbulent times. If there is anything economic uncertainties¬†does not require is¬†stringent interventions and market control. ¬†Notwithstanding, the current economic realities shows exactly the opposite is true in Nigeria. The government has become irrational, unreasonable and erratic with its monetary policy and stubborn of trying to control the inevitable; Naira devaluation.

To stabilize and avoid further mishap,  policy-makers should be put under scrutiny as drastic experimentation with policy conundrum will carry a high risk for the rest of the year, with negative impact towards stabilization and further growth.

This is clearly displayed in the Central Bank of Nigeria’s daily experiment with FX restrictions, bans-unbans and bank charges. Inflation has persistently been on a soaring increase since October 2015. This has triggered stagnation and in most cases a collapse of small businesses, even multinationals companies are struggling to cope.

Despite having assumed office in May of 2015, President Muhammadu Buhari took over six months to appoint a cabinet, leaving the most important ministry in the country; finance ministry without a minister and opening doors for the CBN to assume using economic policies for trial and error re-runs. In October, President Buhari on the realization that the CBN was directionless and the Naira was left to its own device decides to do exact what he did as a military head of state over thirty years ago; controlling monetary policies and the market.

History is repeating itself; President Buhari has again gone back to what didn’t work; in turn lead to Naira overvaluation, job cuts, lower imports a and weakening economic growth. These uncertainties are seeing many foreign investors on the defense by becoming risk averse; sitting on the sidelines awaiting majors changes and clarity on policy directions.

Inducing artificially support to the Naira has attracted harsh criticism by two former CBN governors Charles Soludo and Sanusi Lamido Sanusi. Soludo noted in his interview on the subject matter that ‚Äúfor the better part of last year the external shocks to the economy had been complicated by the “tried and failed” command and control policy regime: a de facto fixed exchange rate; crude capital controls; veiled forms of import bans through a long list of “ineligible for foreign exchange” items; and the de facto scrapping of domiciliary accounts established by law‚ÄĚ.

President Buhari‚Äôs priority on the war against corruption had sparked investor‚Äôs confidence earlier. However, when JP Morgan removed Nigeria from the emerging-market bond index, the inevitable became the obvious. Foreign investor‚Äôs perception of Nigeria has been negatively affected by policy makers, economic managements and Buhari‚Äôs lack of progressive economic reforms ‚ĒÄ interest rates reduction in an uprising inflation and the missing 2016 budget makes the situation worse. The MTN versus the Nigerian Communication Commission has increased global attention to the overall risk and volatility of the Nigerian business environment.

In the case of MTN, while such practices are globally defendable, the current conditions of a functional government in Nigeria have seen the abuse of penalties of the alleged wrongdoing. As the issue is as a result of a lacking uniformed agreement between various regulators. But in this crisis period, the government cannot afford to distract itself from real issues by focusing on fines and creating hostility in the Nigerian business environment. Perhaps, Nigeria is following the path towed by China since the Chinese stock market crash in July last year which wiped 30% off the Shanghai index.

As Nigeria is currently doing, the Chinese policy makers responded to the market shocks with drastic measures for market intervention. Such actions,  however, inspired no tangible confidence but rather, had direct opposite effect by prompting a wave of shattering of local and foreign investors and panic selling. To create resistance to the current realities, policy makers should limit policy flexibility while paying attention to the external shocks already threatening stability and growth outlook.

Nigeria’s growth future is still very hopeful, if the president can hands-off economic policy and policy makers are independent enough to reduce avoidable mishaps. As economic tough times more often than not, require less policy tweaking and control and more of free markets practices, precision and support.

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Looming Crisis as JP Morgan Chase Kicks Nigeria Out

On September 8th 2015, JP Morgan Chase(JPM) released a press statement stating that they had begun the process of discharging Nigeria from its Emerging Market Bond Index from this month, and that by the end of October 2015, Nigeria will be completely off the index.  The statement identified the Nigeria’s restrictions on FOREX transactions and the stringent accompanying policies as a major reason for its actions.

Earlier in the year, JPM had served Nigeria a notice of warning citing investor’s interest among other things in it.  The notice of removal press statement further cited this and the nation’s liquidity crisis as a reason for the removal. The idea of a high-risk economy such as Nigeria being kicked out of a $200 billion fund index is a major cause for concern; indicating a looming financial crisis. Below are the most obvious reasons why;

  • Unfortunately, President Buhari has inherited harder economic times which were looming ahead from his predecessor president Jonathon. Howbeit, the present administration is setting the grounds to blame the past administration for everything that is going wrong and will continue to go wrong until stability which could take up to two years sets in. In turn, Nigerians will blame President Buhari for failing to appoint the single most important minister, a vulnerable economy must never do without; a finance minister. ¬†Considering the fact that JPM served the country a notice of displeasure and the threat to remove Nigeria from the index 9 months ago, president Buhari should have held unto Ngozi Okonjo Iweala (NOI) until things stabilized or at least appointed a new chief economist the day he assumed office. Although, retaining NOI would have been the intelligent thing to do, in the given scenario. ¬†The lack of a finance minister has seen the CBN governor put the Nigerian economy at risk with drastic policies lacking holistic economic direction. The year 2015 has not been a good year economically for Nigeria and Nigerians. Although there were projections of hope post-May 29th, the lack of actions and inactions has created financial tensions, with no glimpse of hope in the nearest future.
  • This will also mean going forward, Nigerian government acquire foreign debt at a premium as the initial 10% interest will increase to 14.5% or more. As a result, negatively impact internal corporate lending between Nigerian government, banks and local organisation. It will also make refinancing existing loans expensive as yields are on increasing.
  • Thirdly, this removal will mean that there is little or no foreign demand from foreign investors. Already, since the warning issued by JPM 9 months ago, the Nigerian bond declined from a peak of $11 billion in 2013/14 to $3 billion at present. The current state of the economy suggests further decline for the Nigerian bond. What this means is that, as a volatile economy, foreign investment will decline as well. Also at risk are SME that depend on banks for small loans such as overdrafts, local purchase orders, letters of credit etc. They may also see their lending rates increase, meaning businesses will struggle, and companies will be focused to downsize and send more people back to the already overpopulated unemployment/job-market. Individuals with consumer loans should expect letters of notification from bank indicating higher interest rate on existing loans.
  • Further, although Nigerian business environment is not problem-free, investors have tolerated it because of Nigeria‚Äôs strategic position in Africa. This removal will see investors moving to more conducive environments such as Ghana, Kenya and South Africa. In turn, Nigeria‚Äôs position as the largest economy in Africa will be threatened.
  • By all indication, further devaluation of the Naira is imminent. As this will ¬†be prompted by frustrated investors who are bound to jump on the bandwagon of JPM decision to remove Nigeria from the index and the Nigeria‚Äôs lack of economic shocks will pave the way for the two factors that are investor‚Äôs worse nightmare; pressure and uncertainty.
  • Lastly, by all indication, what the CBN has done to the Naira and the restrictive FOREX policy, is really ‚Äúthrowing away the baby with the bath water‚ÄĚ. Proper observation suggests that the CBN had good intentions; however, such move is usually a slow process, originated by and based on the federal government‚Äôs long-term growth and development agenda as guided by the chief economist of the federation and healthy economic policies, CBN usually only in this case should act as a support system and not the originated of such moves. But the reverse has been the case here.

A central bank has no business taking such laws into its hands and putting the entire economy and country at risk of financial crisis.  Nigeria already struggles with redistribution and high inequality rates, this singular act, spells harder times for the already vulnerable economy, the struggling Nigerian middle-class and the country’s poor and most vulnerable.

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