By Victor Ogiemwonyi
An economy’s addressable market, is the total demand for goods and services, backed by citizens available purchasing power. Whenever Nigeria is discussed, with respect to its market, the general assumption, is that, because there is a large population,
it also translates to a large market. This is a fallacy. Recent economic hardship in the country is revealing clearly, that the purchasing power available to back the population, for a meaningful addressable market, is lacking. We can see this in the lower consumer purchasing power, lately, where support, for even little things like subscription for basic services, like Telephone, Cable Television etc, are all slowing down, very rapidly. Despite, our adult population of 103m, Netflix subscription in Nigeria, is less than 200,000, even when subscription is only N8500 per month. These are indicators that, our households are now, unable to pay for basic things, like these. Some estimates, put spending, in the lower middle class on food alone, to plus 50% of available household income.
Many consumer products’ packaging , have been adjusted, to reflect the new term “shinkflation” essentially, shrinking their product offering to much smaller sizes, because consumers, cannot afford any further price hikes.
The tough economic conditions, have sapped, consumer purchasing power lately, the twin issues of rising inflation and Naira devaluation is blamed for this. Coming on the hills, of the recent reforms that the Government has embarked on, getting rid of the ruining subsidies on fuel, and
aligning the Naira with the market. Critics say this was the wrong thing to do, but many analysts including this writer, believes it was the only alternative. Not doing these reforms, at this time would have spelt disaster. Too many past leaders were unable to be decisive, about the needed reforms, and worsened the economic situation. What we are experiencing now, is the result of years of failing to take the right decisions.
The accumulated pains is what we have today.
Imagine, if the Jonathan Administration, who rightly saw the need for this decision in 2014, had taken the same decision, instead of succumbing, to pressure from the elite, who are the major beneficiaries, we would have suffered less, than what we are experiencing today.
This is the clear example, of leadership being able to have clarity about an issue, and taking decisive action in the national interest, leaders who pander to the now, get the nation into deeper trouble. Not taking a decision, is failing to do the needful, and therefore a bad decision. That missed opportunity, is what we are suffering today.
Let’s look at, what taking the hard decision to remove subsidies, have achieved. States and local governments, now get a larger share of the monthly FAAC allocation, which has enabled them to pay salaries effortlessly, and engage in providing other vital social services the society needs.
It has rationalised consumption of fuel, amongst the elite, who previously own and buy fuel for three to four SUVs, even when they did not need it. They now know the difference in buying fuel at N197 and buying at N1000.
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Aligning the Naira to market forces has also eliminated one of the biggest source of corruption in Nigeria. The multiple rates for the Naira, was an enabler of corruption. The 100% devaluation for the Naira, is responsible for the high inflation, and higher, cost of living we experience now.
They will all be temporary.
Supposed the over $100billion used in defending the Naira in the last 15years, was put in our Reserves, it would have attracted, more Foreign Trade credit, with the Naira and the economy, stronger for it.
The economy, is already witnessing a positive balance- of- Payments improvement, in the last few months.
Though, it is early days, the current lower value for the Naira, will attract foreign investments, encourage exports, to earn us more Foreign Exchange, and generally improve our economic prospects, and translate to higher productivity, and a stable Naira, that will lead to a higher standard of living in the Long term.
What we need, is a stable Naira, we can plan on.
Imagine, you want to build a factory, you expect to be in operation in three years, and profitable in five years, if you plan with N2,000 to the dollar as exchange rate, you are likely to be assured, nothing will derail your plans. It is only, when we have this certainty, that Investors can invest for the Long term. We are already seeing the opportunity and the incremental recovery, but it is going to take many years to accomplish, but we are on the road now.
The double whammy of high inflation and Naira devaluation, is taken a toll on household incomes, with the consequential effect of higher cost of living. We must work to raise household incomes, now.
Road To Reflating The Economy:
It is no rocket science, that increasing Household incomes, to enhance purchasing power, is key, to getting us, out of the present deep discounts, to the Naira, and has also lowered, the value for our Assets and our standard of living.
The Government has taken some positive steps in this direction, despite the inflation challenge, that has constrained immediate re-inflation. This include, the doubling of minimum wage from N35,000 to N70, 000…providing loans for students in tertiary institutions, with the creation of of NELFund, as well as creating access to credit, like the Credit Corp , that will give credit to consumers, payable in instalments. Their model is compelling: they will give credit to institutions, to on-lend, ….critical to ensuring quick spread, and leave, lending to those who can do it and hold them accountable. This will, ensure repayments come, to further expand the program.
There is also, the loan – guarantee company, that will give standby guarantees, for credits, to small businesses. These are all in the direction of re- inflating our purchasing power and ensuring a quick recovery for the economy.
The bigger picture must focus on growth of the economy, because a double digit growth for 5 years, will reduce poverty considerably, and improve productivity and higher standards of living. Aspiring to a $1trillion economy is a good thing, even if, we end up, with a $750billion economy, in 2030,
it will mean a much higher GDP, with the attendant growth.
All efforts must be geared to achieving this aspiration.
Government Should Concession, …. Large Infrastructure Projects…. They Are Beyond Budgets.
There must be focus on improving our infrastructure but not in the present wrong approach, of trying to finance big infrastructure with Budgets. They are too large for our present budgets, and too urgent to be delayed. These Infrastructure projects, hold the keys to rapid improvements to our economy.
The current approach, is the wrong approach, it wastes money and breeds corruption. Let the big infrastructure projects, be given as concessions, and Governments, can de- risk them, by giving guarantees to investors and other enhancement incentives, like clearing out, the usual regulatory and community obstacles. Concessions must be done, before projects are built, and not after. When it is after, it creates the opportunity for corruption, in awarding the contracts.
Only, self liquidating loans for projects, should be engaged in, by Governments, better still, let the private sector, do the borrowing. Their evaluation processes are more credible.
The Tax and Interest Rate, Angle, In Re- Inflating , The Economy.
Taxing citizens and companies, to contribute to development is good, but they must be appropriate Taxes, that are, progressive, and at rates, that will lead to higher compliance.
In an article I wrote in 2024,
I advocated for a higher threshold of a minimum of N50million Turnover, to be eligible, to pay tax , for SMEs. Glad this has been considered in the recent Tax reform bill. Unfortunately, a new 4% development Tax for companies, has now been added, a new burden and a further strain on Companies. Corporate Taxes are being reduced everywhere, the UK for instance has a corporate tax rate of 25%
I don’t know why we want to kill the goose, that lays the golden eggs. It is always easy to impose, very so often, new taxes and levies, without considering the implications.
In an economy, where a company pays 30% for bank credit and pays another 34% as Taxes, there is little incentive to invest more.
We must see the lowering of Taxes for companies, as the discount for inflation in the economy, especially given the very difficult operating environment in Nigeria. We need to improve Corporate profitability and household incomes, rather than, further, increase its, Tax burden.
The other necessary and urgent review to embark on, is how to lower interest rates, no economy can grow at the high interest rates in the economy. While, the current high interest rates, are necessary to cool the very high inflation. We must start the roll back gradually, as inflation seems to be stabilising and heading downward.
The credit reserve requirement (CRR) now 50% of deposits for Banks, as imposed by Central Bank of Nigeria ( CBN ) should be reviewed lower, this can be brought down to 25%. The lending function in Banks, is seriously constrained by this high CRR requirement. The CBN should find other ways to fight its excess liquidity challenge. The economy needs re- inflation now, to grow.
I have always, said that 30% interest, on loans, in any economy, will not encourage investors and in our case, high interest rates have worked modestly, to lower inflation. While it was necessary in the immediate past, to slow down inflation, we must now focus on growing the economy. We must adopt the model, of the Asian tigers of the 1980s, and aim to grow faster than inflation.
I have always personally, heard the view, that inflation rate, in any economy, is the aspirational growth rate of that economy. If inflation rate is 16% in an economy, for instance, and growth rate is 6%, the 10% difference is the aspirational growth the economy requires to be perfectly efficient.
Pandering To The Poor.
Finally, we should rapidly expand the cash grants to the poor. It is a necessary give-away, it contributes to the economy, because the money will be spent, in the local communities, it will also add to growing purchasing power, in the economy. There should however, be clarity, as to who benefits from this.
I have long held the view that the poor in society, are the objective measurement, of society’s wellbeing. That is, why, I personally believe in Micro Credits, as an effective tool for social engineering, particularly when focused, on micro Entrepreneurship.
In the year 2000, inspired by the work of the Bangladeshi Economist, Mohammed Yunus, I sold the idea of the first Government sponsored Micro Credit Scheme in the country, to the then Edo State Government, this was before, any Micro Finance Bank, existed in Nigeria.
Unfortunately the Edo state Government at the time, did not like it, so much. Focusing on our poor, in the absence of opportunities, and high unemployment, is the right thing to do.
Consumer spending… is much lower now … since the economic crisis started…we have an opportunity now, to gradually build and strengthen purchasing power, to enhance growth , we should do everything, not to stifle it…
Victor Ogiemwonyi is a retired Investment Banker, and writes from Ikoyi, Lagos.
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